FOREIGN EXCHANGE GAIN OR LOSS ITEMS

AS-11 and IND AS 21 deal with Transactions in Foreign Exchange .

             An enterprise may carry on activities involving foreign exchange in two way , It may have transactions in foreign currencies or It may have foreign operations . in order to include foreign currencies transactions in the financial statements transactions must be reported in the enterprise reporting currency.
           So while dealing with such type of transactions there may be either foreign exchange gain or loss due to fluctuations in the rates of reporting currency and foreign currency in the financial statements.

I will explain with an example
A Ltd Indian company has Sold a Goods to Z Ltd in US worth 5000US dollar . rate of exchange on the date of transaction is 1US dollar =75 Indian rupees. and when we received money after one month rate was 1US dollar= 80 Indian rupees.

So Journal entries will be as follows.

Trade Debtors A/c Dr 375000/-
To Export Sales A/c Cr  375000/-
( export sales - 1dollar =75 INR )

When we receive money

Bank A/c Dr 400000/-
To Exchange Gain A/c Cr 25000/-
To Trade Debtors A/. Cr 375000/-
( receipt of payment , 1 dollar= 80 rupees)

So in above case we have exchange gain of RS 25000/- will be transferred to P&L account.

Exchange Gain A/c Dr 25000/-
To profit and loss A/c Cr 25000/-
(Gain transferred)
above is an example of exchange Gain.

Now in Case of loss exchange rate will be less for example 1dollar = 70 INR so receipt entry will be

Bank A/c Dr 350000/-
Exchange loss A/c Dr 25000/-
To Trade Debtors A/c Cr 375000/-
( receipt of payment, exchange loss )

Loss transferred to P&L account

Profit and loss A/c Dr
To Exchange loss A/c Cr
( Loss transferred)

In practically we have to consider exchange rates as per transaction date, balance sheet closing date etc. above is an example.

Simply , foreign instance I have sold my goods on 1.4.2022 to Mr x...( on the day exchange rate is rupees 70) Mr x paid the amount on 1.8.2022 on the day exchange rate is rupees 85) ...

... so this is the foreign loss for me exchange loss am I correct...


Note : is there exchange rate amount is higher than our invoice date that is foreign Exchange loss for us.. correct??

You sold Goods  rate was  70 , you receive money rate was 85 , Its exchange Gain of  Rs 15/-  .

Oh.. so the buyer has to pay not invoice date??

Exchange rate on the Date of transaction initially recognise.

So,goods on 1.4.2022 to Mr x ( this is my initial recognize)

Sales date ( Invoice date ) and receipt of payment date are the transactions date initially recognise.

Sir ,I raised the invoice on 1.4.2022 to my party on that day exchange rate is RS 70 ...my party paid to me on 1.8.2022 on that day exchange rate is RS 85....


My Query no:1.whether my party should have to pay which exchange rate of data my invoice race date or he paid date???


Query no: 2 what is mean by spot rate, forward rate and contract rate

1. Exchange  rate  will be date of  payment ,  not  Invoice date  , this an example  to  understand  gain  or  loss 

2.  you  have  to refer  in detail  AS 11  and  IND AS 21  for  spot rate , forward rate  etc.  practically  used in the business .

Thank you so much for your reply thank you