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As-11

SACHIN garg (ca ) (181 Points)

03 August 2011

a company has given advance of $10000 @ 45(Rs.450000) to its supplier of raw material. After 5 months when rate of dollar increase to47 it receives material & credited the supplier account.

supplier 450000

To Bank 450000

( being advance made)

Which of the following two entries is correct?

Purchase 450000 Purchase 470000

To supplier 450000 OR To supplier 450000

( being advance adjusted) To exchange difference 20000

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7 Replies

manish advani (article) (24 Points)
Replied 03 August 2011

2nd entry is correct...

CA.B.Sivakumar (-) (162 Points)
Replied 11 August 2011

II nd entry is correct and the amount of Rs.20000/- is your exchange rate gain which is the invisible profit to the company and vice-versa.

SACHIN garg (ca ) (181 Points)
Replied 21 August 2011

is there any such illustration in any book so that i can support the answer because i am finding it difficult to convince the client who is insisting that there will be no exchange fluctuation.

sri rama krishna mallela (Junior Manager F&A) (204 Points)
Replied 22 August 2011

the entries to be made are

1. advace given to suppliers DR 450000

To Bank 450000

(Being advance given to supplier for supply of material)

2. the following entry has to be passed on the date the material has been perchased from him

a. first entry should be for exchange gain on monetory item ie advace given to supplier

adv given to supplier DR 20000

exchange gain on forex transaction 20000

b. the entry for purchase of material is

purchase dr 470000

To Adv given to sup 470000

Yogesh (Manager) (50 Points)
Replied 22 August 2011

The above answers seems to be wrong. We have to see the definition of Monetary item, which only require restatement. Any advances for purchase of raw material or capital items are not monetary items since you do not get fixed determined amount of money. Therefore, there is no requirement to restate advances paid for raw material and therefore inventory will get accounted at Rs 450,000. There is an EAC opinion from ICAI to support this. The position is same in IFRS as well.

Hope this clarifies.

Regards, Yogesh Singhal