Reinstatement of foreign debtors

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Querist : Anonymous

Querist : Anonymous (Querist)

28 July 2011 If normal debtors are reinstated at TT buying rate at year end, then whether debtors with closing credit balances should be revalued at TT selling rate?

Kindly clarify which rate is to be used for reinstatement of debtors with closing credit balances??

CA Sachin D Jain

CA Sachin D Jain (Expert)
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29 July 2011 Dear Author,

Closing credit balance of debtors imply we have received excess money as advance from our customers, which is our current liability as at the end of the year. This means that we need to buy foreign currency from the market / authorised dealers to make the payment to foreign debtors having credit balances. Hence, the rates to be used while conversion is buying rate of foreign currency from the market.

Querist : Anonymous

Querist : Anonymous (Querist)

29 July 2011 Dear Sir,

If we have received excess money as advance from customer, then where is the need to make payment to foreign debtors having credit balances???

CA Sachin D Jain

CA Sachin D Jain (Expert)
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29 July 2011 Dear Author,

When preparing the balance sheet as at the end of the year, the monetary items are restated as at the rate of exchange prevailing as at the balance sheet. The basic concept behind this is that as they are monetary items, they should be recorded as their fair value (assuming that they are crystalised as at the balance sheet date). On the basis of this concept and logic, we reinstate all monetary items as if they are going to be received or paid as the closing exchange rate.

Querist : Anonymous

Querist : Anonymous (Querist)

29 July 2011 Sir,

Just wanted to know what would be the exchange rate applicable to reinstate Foreign debtors with Closing credit balances? Whether it should be the TT buying or Selling rate? And how could be it the buying rate of foreign currency from market as already the company has received advances from customers. So what would be the appropriate rate of exchange to reinstate the credit balances of foreign debtors at the financial year end?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2025 Your question relates to the appropriate exchange rate to use for reinstating foreign debtors with closing credit balances (i.e., advance received from customers) at year-end for accounting purposes. This is a nuanced area involving accounting standards (especially AS-11 or Ind AS 21) and foreign exchange conversion norms.

🔍 Understanding the Scenario:
Foreign Debtors normally have debit balances (i.e., you are to receive money from them).
However, if they have credit balances, it means:
You've received advance payments from customers (unearned revenue).
This is your liability as on the balance sheet date (you owe goods/services to the customer).
✅ Applicable Accounting Standard:

For Indian GAAP:
Refer AS-11: "The Effects of Changes in Foreign Exchange Rates"
For Ind AS (if applicable):
Refer Ind AS 21: “The Effects of Changes in Foreign Exchange Rates”
📌 Rule for Monetary Items:

Monetary items denominated in a foreign currency must be reported using the closing exchange rate (i.e., spot rate at balance sheet date).
So the key question becomes:
Which exchange rate — TT Buying or TT Selling — should be used?

✅ Answer:

▶️ If the balance is an advance received from foreign customers:
This is a monetary liability.
When you need to return the amount or deliver goods/services, you'll need to sell the foreign currency.
So, use the TT Selling Rate.
💡 Rate Selection Logic:

Nature of Item Balance Classification Exchange Rate
Foreign Debtors Debit Monetary Asset TT Buying Rate
Foreign Debtors Credit (Advance) Monetary Liability TT Selling Rate
This aligns with RBI/ICAI guidelines and practical accounting treatment under AS-11.

📘 Reference – ICAI GN (Guidance Note):

The ICAI Guidance Note on Accounting for Foreign Currency Transactions recommends:

"For monetary items, where inflow of foreign currency is expected (like receivables), TT buying rate is used. Where outflow is expected (like payables), TT selling rate is used."
✅ Summary:

Foreign Debtors with Credit Balance (Advance Received):
Treated as monetary liability
Use TT Selling Rate at year-end for revaluation
Gain/loss arising should be recorded in P&L A/c (as per AS-11)

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