Exchange gain or loss - What is an exchange gain or loss?
Definition: An exchange gain or loss is caused by a change in the exchange rate used such as when an invoice is entered in at one rate and paid at another, this will generate an exchange gain or loss.
If your company buys goods from abroad and you are charged for these goods in a different currency than your base currency (which will normally be GBP if your company is registered in the UK), then when you go to pay this invoice in the same currency, the rate of exchange will invariably be different than when you booked the supplier invoice into your accounting system. This difference is called an exchange gain or loss, depending on which way the exchange rate has changed - up or down in value.
Likewise, if you raise a sales invoice in Euros and then your customer pays you in Euros the same probably apply.
Accounting for exchange differences
In most accounting systems the chart of accounts will include an account or nominal code for exchange differences.
When you create a customer or supplier, you can select which currency they work in (so you can change it if it's different than your base currency). When you process the receipt or payment, this entry must be in the same currency as the original transaction in order for two things to happen: firstly that the invoice will be matched and subsequently removed as an “Open item”, and secondly that any exchange difference bought about by this will be posted to the exchange rate account or nominal code within your chart of accounts.