While studying book entries I came across the following problem re a book entry (BE): You are a US based consulting company and the base currency is USD. You deliver consulting to an European company 1) You sent an invoice to an European company for consulting work for EUR 1000. BE: Account receivable / Consulting income EUR 1000 (assume that both accounts are in EUR) 2) The European company wires you EUR 1000 on your current account, which is in USD. So the bank automatically converts EUR in USD. BE: Current account / account receivable EUR 1000 3) Now the question: How do you book the conversion from EUR to USD? Thanks Andreas
is there a page reference for this problem? or is it something you’ve thought about? It doesnt make sense to mix different currencies for accounts so we would transfer the EUR cash to the USD account once it is received. this is how I would structure the transaction. 1) EUR AR DR and EUR SE CR for 1000 2) EUR AR CR 1000 and EUR CASH DR 1000 3) EUR CASH CR 1000 and SE DR 1000. USD CASH DR 1000*rate and SE CR 1000*rate SE = shareholders equity or equity
You record the initial receivable/revenue in USD (the home currency) at whatever the spot Euro/USD exchange rate is at that time. On settlement date (when the cash gets wired), you recognise changes in the value of accounts receivable due to Euro/USD fluctuations through the P&L. Then when you receive the 1000 EURO, you record the increase in cash and decrease in receivable in USD. Of course, because you adjusted the receivable to reflect the current exchange rate (the gains/losses of which went through the P&L) it all balances properly. Ie the receivable at the date of cash receipt has been adjusted to the USD equivalent of 1000 EUR at the current exchange rate, so when you receive the 1000 EURO and convert it to USD, the cash you receive balances the receivable. Say that on invoice date, the exchange rate is 1EUR = 2USD, we go dr Accounts receivable 2000 cr Consulting revenue 2000 On the date of settlement, the exchange rate is now 1EUR = 2.2USD, we go dr Accounts receivable 200 cr Foreign exchange gains 200 dr Cash 2,200 cr Accounts receivable 2,200 It’s all recorded in USD.
The journal entry on the settlement date should three lines. You don’t inflate the accounts receivable by the amount of the gain. DR: Cash $2,200 CR: A/R $2,000 CR: Foreign Exchange Gain $200
Doesn’t the forex gain go straight into equity as it is classified as “other comprehensive income” instead of the income statement?
No, it should go to the income statement. I think you are thinking of a hedging example where a derivative is used as a fair value hedge. That would go to the OCI instead of the income statement.