Exchange gain or loss - What is an exchange gain or loss?
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
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If your company buys goods from abroad and you are charged for these goods in a currency different from your base currency (typically GBP, if your company is registered in the UK), when you go to pay this invoice in the same currency, the rate of exchange will invariably be different from when you booked the supplier invoice into your accounting system.
Likewise, if you raise a sales invoice in Euros and then your customer pays you in Euros the same will 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 the currency in which they operate (you can change it if it differs from 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 important functions to occur:
- First, that the invoice will be matched and subsequently removed as an “Open item”.
- Second, that any exchange difference brought about by this will be posted to the exchange rate account or nominal code within your chart of accounts.
Unrealised vs. realised gains and losses
Dealing with a gain or loss caused by currency exchange differences is similar with both invoices created by your business, as well as expenses encountered. They should be recorded on your balance sheet appropriately. When it comes to the expenses side, there are two types of losses:
Unrealised gain/ loss
An unrealised gain or loss would be noted as an exchange loss in the asset section of your records. It would also be recorded as an exchange loss on the liability section.
A realised loss would be registered as an expense, and would specify that it is a loss related to currency exchange.
Multi-currencies in your invoicing software
With the exception of Word and Excel invoice templates, most invoicing softwares today allow you to apply different currencies to your invoices. Online invoice software makes this as easy as a click of your mouse.
Depending on your business, it might be optional whether to choose to create an invoice in the currency of your customer, should they be based in a different currency. But there are a number of reasons to do so. Read more about what to keep in mind with multi-currency invoicing in our blog.
Exchange rate in Debitoor
Debitoor invoicing software allows you to change the currency of your invoice by simply selecting your desired currency from a drop down menu. The exchange rate for your invoice is set automatically based on the current currency exchange information but can be manually adjusted for a more standardized rate.