Foreign transaction

A/c entries 800 views 3 replies

can any one tell me - on 01/04/xx 1000$ have been advanced to foreign supplier, forex rate on that is 45 Rs/$ ,after 30 days, on 30/04/xx goods received with invoice for 1000$ but on 30/04/xx  for the purpose of Bill of Entry customs authority has taken 46Rs/$  - what accounting entries required on 01/04/xx and 30/04/xx, in paricular what is the cost of purchases in this situation?

Replies (3)

1) on 01/04/XXXX

 Party A/c             Dr            1000 X45

                        To Bank A/c                 1000 X 45

 

2) On 30/04/XXXX

Purchase A/c      Dr.           1000 X46

                  To party A/c                           1000X46

 

3) on 30/04/XXXX

Party A/c Dr                           1000X(46-45)

                 To exchange fluctuation a/c        1000X(46-45)

Well in the above querry, there is Zero exchange gain and loss on purchase of machine. Advance paid to supplier and inventories is a non- monetary asset and need to be recorded at historical cost. The cost of inventory i.e USD 1,000 was paid when the exchange rate was 1 USD = 45 so the cost of inventory should be recorded as 45,000. Exchange rate prevailing on the date of receipt of goods i.e 1 USD = 46 is irrelevant for the cost of goods.

 In a layman sense, exchange loss or exchange gain is recognised only when there is an exposure to the variability in exchange a rate. In the above case, the entire cost of machine i.e USD 5,000 was paid as an advance and thus, any change in the exchange rate in the later period will result in zero exposure to the company and thus, the exchange rate prevailing on the date of giving 100% advance is relevant for recording the cost of goods.

All gains will be recorded only on the disposal of these inventories.

 Sumit and Anirudh, I hope this will clarify your understanding.

Sir,

please accept my apology for not thanking you as soon as you replied. Now i would like to mention the intention with which i posted the query.

Basic priciple of accounting is "only the actual expenses incurred can be added to the cost of goods" in the above query the importer's actual expenses/actual money paid in respect of the purchases is  is Rs. 1000*45 (45000) only ,so, the cost of purchases should be Rs. 45000 only.

i feel it cannot be Rs. 46000 (As suggested by, Respected ,CA Sumit grover - because the rate considered, i.e., 46/$, for BoE is in line with the customs procedure, it has got nothing to do with the cost of purchases in the books of importer.

 

Sachin sir,

I agree with your opinion and thank you.

 


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