Exchange rates, gains and losses

The idea

A supplier invoice in euros is booked in dollars at the exchange rate of its day. A payment is booked at the rate of the payment day. When the two rates differ, the dollars paid differ from the dollars owed, and that difference goes to its own account. The screens use example data; the rates are examples, not market rates.

Step by step

Step 1. Open the purchase invoice

In this example it is from Lisbon Tile Works, dated October 14. Currency is euros, Exchange Rate is 1.092, and the status is Partly Paid.

Step 2. Open the payment

Dated October 20: paid amount $5,500.00, received amount 5,000.00 euros, Target Exchange Rate 1.10. Five thousand euros at 1.092 is $5,460.00, so the payment cost $40.00 more.

Step 3. Read the General Ledger for the payment

Under Reports, open General Ledger and filter by the payment. It takes $5,500.00 off Creditors EUR - PD and pays it out of the cash account. The difference is booked separately.

Step 4. Filter by the exchange gain and loss account

One line: $40.00 on the debit side, journal entry, subtype Exchange Gain Or Loss. A debit here is a loss; a lower payment rate would give a gain.

Step 5. Open the Payment Ledger

Filter by the supplier. It lists the invoice ($14,305.20), the payment (-$5,500.00), the difference (+$40.00) and Outstanding $8,845.20, the remaining euros at the invoice rate.

What you may see on your own site

• Your accounts, currencies and rates are your own. Ask your accounts team which account holds exchange differences.

Common mistakes

1. Treating example rates as market rates.
2. Looking for the difference inside the payment's own ledger lines. It is booked on its own journal entry.
3. Reading a debit on the gain and loss account as a gain. A debit there is a loss.