How is the working of Exchange gain and loss done ?
Hi there, rohit4.
A foreign exchange gain/loss occurs when a company buys and/or sells goods and services in a foreign currency. And, that currency fluctuates relative to their home currency. It can create differences in value in the monetary assets and liabilities, which must be recognized periodically until they are ultimately settled. The value of the foreign currency, when converted to the local currency of the seller, is called the exchange rate. That said, if the value of the home currency increases after the conversion, the seller of the goods will have made a foreign currency gain.
However, if the value of the home currency declines after the conversion, the seller will have incurred a foreign exchange loss. If it is impossible to calculate the current exchange rate at the exact time when the transaction is recognized, the next available exchange rate can be used to calculate the conversion.
There are two types of foreign exchange gains or losses. These are Unrealised and realised. Unrealised foreign exchange gains or losses are profits or losses that have occurred on paper due to changes in exchange rates. These gains or losses are only realised after the transactions have been completed. When money has actually been collected or paid.
That is why QuickBooks Online shows the effect of a Home currency adjustment on Accounts Payable or Accounts Receivable as an unrealised gain or loss. The effect on account types such as bank accounts as a realised foreign exchange gain or loss. Unrealised gains or losses are also not reflected in the general ledger or the trial balance.