Example

This example illustrates currency exchange and revaluation:

  1. Currency Exchange

    Pierre's Catering Service invoices LGE Corporation for 1500 GBP.

    LGE Corporation's base currency is US dollars (USD).

    Invoice Date is March 15.

    Invoice Due Date is April 15.

    Exchange Rate on March 15 is 0.1642.

    Invoice is exchanged to $246.30 (1500 GBP * 0.1642) in the base currency.

    The sample journal entry to record the transaction is:

    Account Debit Credit
    Food expense $246.30
    Accounts Payable $246.30
  2. Currency Revaluation

    On March 30, the invoice remains unpaid.

    The exchange rate is now 0.1662.

    The base currency invoice value if paid today would be $249.30.

    An unrealized loss is recorded by LGE Corporation.

    The sample journal entry to record the unrealized loss is:

    Account Debit Credit
    Unrealized Loss $3.00
    Accounts Payable $3.00
  3. Revaluation (next period)

    On April 30, the invoice remains unpaid.

    The exchange rate is now 0.1674.

    A reversing entry to remove the unrealized loss ($3.00) must be recorded by LGE Corporation. An entry for the new unrealized loss ($4.80) must also be recorded.

    The sample journal entry would be:

    Account Debit Credit
    Accounts Payable $3.00
    Unrealized loss $3.00
    Unrealized loss $4.80
    Accounts Payable $4.80
  4. Payment

    On May 1, the invoice is paid.

    The exchange rate is now 0.1677.

    The base currency invoice value is $251.55.

    The sample journal entry to record the realized loss would be:

    Account Debit Credit
    Accounts Payable $251.10
    Cash account $251.55
    Realized loss $5.25
    Unrealized loss $4.80