Treatment of Exchange Rate Difference

How can I treat exchange rate difference from accounting point of view? Can I reconcile exchange rate difference in cash book.

Salima Sanyang from The Gambia

Salima Sanyang! First of all you should understand, what is exchange rate difference. If you buy from or sell goods in foreign country. At that time, you have to deal foreign currency. If payment date is different from buying or selling date. At that time, exchange rate difference will happen because foreign exchange rates fluctuates daily basis. Difference of exchange rate may be use revenue profit or loss as per accounting rule.

Accounting Treatment of Exchange Rate Difference in Same Accounting Period

Suppose, you bought some goods from USA on credit and its price is 10000 USD. Date was 10 Aug. 2011.  If you live USA, then there is no problem. No accounting treatment of exchange rate difference. But you are living in West Africa's The Gambia whose currency is Dalasi. 1 USA Dollar is equal to 28.29 Dalasi. But, if you will pay on 12 Sept. 2011 and suppose, at that time 1 USA Dollar is equal to 20 Dalasi due to becoming your currency strong. It means at 12 Sept. 2011, you will pay less and you will get profit from exchange rate difference. We can calculate, how much, you will get profit:

If you close your account, you will show 82900 Dalasi as Forex profit in the credit side of your profit and loss account. 

Accounting Treatment of Exchange Rate Difference in Two Accounting Period

In above example, you will pay in 5 Jan. 2012, then your accounting treatment will different in above transactions. Check the exchange rate at the end of 31st Dec. 2011 when you will close your accounts. Suppose rate is 30 Dalasia per dollar. It means you will get 1.71 Dalasia per dollar loss at the end of your books. Show it in the debit side of profit and loss account by multiplying it with 10000 dollars and by writing "To outstanding Loss due to Forex Rate Difference account". And show it in the liability side of balance sheet because we did not pay this loss at the end of year. So, this is also our liability. 

Now, if you pay at 5 Jan. 2010 with 20 dalasia per dollar, then you have to treat in the final account of Dec. 2012. Now your total profit is 82900 Dalasia but you have to adjust last year outstanding loss from it and net profit on forex rate difference will show in credit side of profit and loss account. Because outstanding loss of previous year is adjusted from our profit from rate difference, now, no need to show previous year outstanding rate difference in balance sheet. 

Reconciliation of Exchange Rate Difference in Cash Book

Yes, sometime, you deposit same amount in your bank on the estimation of future exchange rate. But bank pays your foreign dues on the basis of exchange rate of that date. Due to that reason, your cash book will not match with bank statement. Now, bring bank statement from bank and see whether you did pay at what amount and also see, what amount did your bank pay? Difference of this will be exchange rate difference and add or less in your cash book balance according to this. After this reconciliation, your cash book will match with bank statement.