If you invoice or pay in a currency other than your own, the exchange rate can change between the day you record a transaction and the day the money moves. The difference is a foreign exchange gain or loss. Understanding it stops your accounts from looking wrong when nothing has really gone wrong. This guide is general information, so ask an accountant about tax.
Realised gains and losses
A realised gain or loss happens when a foreign-currency invoice or bill is actually paid, and the rate on payment differs from the rate on the invoice date.
An example
- You invoice a US client $1,000 when $1 = £0.80, so you record £800.
- The client pays when $1 = £0.76, and you receive £760.
- You have a realised loss of £40.
If the rate had risen to £0.84 you would have a realised gain of £40.
Unrealised gains and losses
An unrealised gain or loss arises on balances that are still open at the end of a period, such as an unpaid invoice or a foreign bank balance. You have not received or paid the money yet, but its value in pounds has changed.
- At the end of the month you are owed $1,000 and the rate is £0.78, so the debt is worth £780 instead of the £800 recorded.
- That is an unrealised loss of £20.
Revaluation
Revaluing open foreign-currency balances at the current rate brings your balance sheet in line with reality. The gain or loss is posted to an exchange gain and loss account. Many businesses revalue at each month end and at the year end. Revaluations are normally reversed when the item is paid, so you do not count it twice.
Where it appears
Exchange gains and losses appear in your profit and loss, usually under other income or other expenses. Your balance sheet shows foreign balances at the latest rate. A currency exposure report shows what you hold or owe in each currency, so you can see your risk.
Ways to reduce the risk
- Invoice in your own currency, or agree a fixed rate.
- Keep a foreign bank account for receipts you will spend in that currency.
- Ask for quicker payment, to shorten the exposure.
See how to invoice overseas clients.
How AvrioBooks helps
Use daily exchange rates for foreign-currency invoices, bills and payments, revalue open balances and run a foreign currency exposure report. Multicurrency is available on the Standard plan and above. See multicurrency accounting software and the help guide Work in multiple currencies.
Frequently asked questions
What is a realised exchange gain or loss?
The difference that arises when a foreign-currency invoice or bill is paid and the rate on payment differs from the rate on the invoice date.
What is an unrealised gain or loss?
A change in the pound value of a foreign balance that is still open, such as an unpaid invoice or a foreign bank balance.
What is revaluation?
Restating open foreign-currency balances at the current exchange rate and recording the gain or loss.
Does AvrioBooks handle revaluation?
Yes, on the Standard plan and above, with daily exchange rates and a currency exposure report.
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