Foreign Currency Transactions — Accounting Entries
Scenario 1: Purchase of Goods from a Foreign Supplier
A company purchases goods from a foreign supplier for USD 1,000. The exchange rate on the transaction date is ₹83 per USD.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Purchases / Inventory | 83,000 | — |
| Foreign Supplier Payable | — | 83,000 |
What this means
The purchase and supplier liability are initially recorded in INR using the exchange rate on the transaction date, subject to the applicable accounting requirements.
Scenario 2: Payment to Supplier When the Exchange Rate Increases
The company settles the USD 1,000 payable from Scenario 1 when the exchange rate is ₹85 per USD. The original liability was ₹83,000, but settlement costs ₹85,000.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Supplier Payable | 83,000 | — |
| Foreign Exchange Loss | 2,000 | — |
| Bank | — | 85,000 |
What this means
The company pays ₹2,000 more than the liability originally recorded. The difference is recognised as a foreign exchange loss under the assumed accounting treatment.
Scenario 3: Payment to Supplier When the Exchange Rate Decreases
A company has a foreign supplier payable of USD 1,000 recorded at ₹83 per USD. It settles the liability when the exchange rate is ₹81 per USD.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Supplier Payable | 83,000 | — |
| Bank | — | 81,000 |
| Foreign Exchange Gain | — | 2,000 |
What this means
The liability is settled for ₹81,000 even though it was originally recorded at ₹83,000. The ₹2,000 difference is a foreign exchange gain under the assumed accounting treatment.
Scenario 4: Sale to a Foreign Customer
A company sells goods to a foreign customer for USD 2,000. The exchange rate on the sale date is ₹84 per USD.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Customer Receivable | 1,68,000 | — |
| Sales Revenue | — | 1,68,000 |
What this means
The revenue and receivable are initially recorded at the transaction-date exchange rate, subject to the applicable revenue-recognition requirements.
Scenario 5: Receipt from Customer When the Exchange Rate Increases
The company receives USD 2,000 from the customer in Scenario 4 when the exchange rate is ₹86 per USD. The receivable was initially recorded at ₹1,68,000, but the bank receives ₹1,72,000.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank | 1,72,000 | — |
| Foreign Customer Receivable | — | 1,68,000 |
| Foreign Exchange Gain | — | 4,000 |
What this means
The company receives ₹4,000 more than the INR value initially recognised for the receivable. The difference is recognised as a foreign exchange gain under the assumed accounting treatment.
Scenario 6: Receipt from Customer When the Exchange Rate Decreases
A company has a customer receivable of USD 2,000 recorded at ₹84 per USD. It receives the payment when the exchange rate is ₹82 per USD.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank | 1,64,000 | — |
| Foreign Exchange Loss | 4,000 | — |
| Foreign Customer Receivable | — | 1,68,000 |
What this means
The company receives ₹4,000 less than the INR value initially recognised for the receivable. The difference is a foreign exchange loss under the assumed accounting treatment.
Scenario 7: Year-End Revaluation of a Foreign Supplier Payable
A company has an outstanding supplier payable of USD 1,000 recorded at ₹83 per USD. At the reporting date, the applicable closing rate is ₹85 per USD. The payable must be increased by ₹2,000 under the assumed treatment for this monetary liability.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Exchange Loss | 2,000 | — |
| Foreign Supplier Payable | — | 2,000 |
What this means
The outstanding foreign currency liability is retranslated at the applicable closing rate. Because the INR equivalent has increased, the company recognises a loss under the assumed treatment.
Scenario 8: Year-End Revaluation of a Foreign Customer Receivable
A company has an outstanding receivable of USD 1,000 recorded at ₹84 per USD. At the reporting date, the applicable closing rate is ₹82 per USD. The receivable decreases in INR value by ₹2,000.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Exchange Loss | 2,000 | — |
| Foreign Customer Receivable | — | 2,000 |
What this means
The foreign currency receivable is retranslated at the applicable closing rate. Because its INR value has decreased, the company recognises a loss under the assumed treatment.
Scenario 9: Foreign Currency Bank Balance Revaluation
A company holds USD 1,000 in a foreign currency bank account. Its recorded INR value is ₹83,000. At the reporting date, the applicable closing rate is ₹85 per USD, making the balance worth ₹85,000.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Currency Bank Account | 2,000 | — |
| Foreign Exchange Gain | — | 2,000 |
What this means
The foreign currency bank balance is a monetary item. Its INR equivalent increases by ₹2,000 when translated at the assumed closing rate, resulting in a foreign exchange gain under the assumed treatment.
Scenario 10: Foreign Currency Loan Revaluation
A company has an outstanding foreign currency loan of USD 10,000 recorded at ₹83 per USD. At the reporting date, the applicable closing rate is ₹85 per USD. The INR equivalent of the loan increases from ₹8,30,000 to ₹8,50,000.
Accounting Entry
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Exchange Loss | 20,000 | — |
| Foreign Currency Loan Payable | — | 20,000 |
What this means
The outstanding foreign currency loan is retranslated at the applicable closing rate. Because the INR amount required to settle the loan has increased, the company recognises a foreign exchange loss under the assumed treatment. Special rules may apply to certain long-term foreign currency monetary items and borrowing costs.