Recording Unrealized Currency Gains and Losses

Even before you make or take payment on international transactions, or withdraw money from a foreign bank account, there is the potential for changes in the exchange rate to affect the value of your transactions and accounts. This potential is referred to as an unrealized gain or loss.

For example, if you have a bank account in Paris and the value of your local currency drops compared to the French franc, the value of your Paris bank account goes up. You have the same number of francs, but those francs are worth more in your local currency than they used to be. Since those francs still are in your bank account, however, you haven't taken advantage of, or realized, their increased value.

Some, but not all, companies need to account for unrealized gains and losses; consult with your accountant if you're unsure whether or not you need to track this information for your business.

To keep track of your unrealized gains and losses, you'll have to print a report and then use information from the report to create a General Journal entry.

Updating exchange rate

In order to accurately calculate unrealized gains and losses for the current month, you must first update the currency's exchange rate to reflect the current rate. If you don't perform this step, your unrealized gains and losses will be misstated. You can change the currency's exchange rate to its previous rate after you've recorded your unrealized gains and losses. Go to Lists > Currencies, and edit the currency you want to change.

To Record the Journal Entry

  • Go to the Accounts Command Center and click Record Journal Entry
  • Enter the date (generally the last day of the month) and a description of the transaction.
  • In the scrolling list in the middle of the window, enter a transaction for the unrealized gain or loss. This transaction should have a separate debit and credit entry for each account that appears on the Currency – Unrealized Gain/Loss Report (Reports > Accounts > Currency).

If the account is an asset account

  • If the Currency – Unrealized Gain/Loss Report shows a currency gain for a checking account or another asset account, credit the Unrealized Currency Gain/Loss account, and enter an equal debit amount for the exchange account associated with the asset account. (The Unrealized Currency Gain/Loss account should be an expense account.)
  • If the Currency – Unrealized Gain/Loss Report shows a currency loss for the asset account, debit the Unrealized Currency Gain/Loss account, and enter an equal credit amount for the exchange account associated with the asset account.

If the account is a liability or equity account

  • If the Currency – Unrealized Gain/Loss Report shows a currency gain for a liability or equity account, credit the Unrealized Currency Gain/Loss account, and enter an equal debit amount for the exchange account associated with the liability or equity account.
  • If the Currency – Unrealized Gain/Loss Report shows a currency loss for the liability or equity account, debit the Unrealized Currency Gain/Loss account, and enter an equal credit amount for the exchange account associated with the liability or equity account.
  • Save the General Journal entry as a recurring transaction. By doing this, you'll save time when you record your unrealized gains and losses in future months. Click the Save Recurring button; the Save Recurring Transaction window appears.
  • Enter a name for the transaction, then choose a frequency (Monthly is recommended) and the day on which you want this transaction to appear in the To Do List window each month. Click Record to save your entries and close the Save Recurring Transaction window.
  • In the Record Journal Entry window, click the Record button to record the transaction for this month.

Reversing previous month's entry

When you track unrealized gains and losses, you make an entry for the current month, then reverse the entry you made in the previous month. It's important that you remember to reverse the previous month's entry; if you don't, gain and loss amounts for future months will be inaccurate.

Make sure your preferences are setup to Reverse entries. Go to Setup > Preferences > Security and put a check in the box indicating transactions cannot be changed, they must be reversed.

Notes:

  • For realized gains or losses on sales and purchases, a posting is automatically made to the Currency Gain/Loss account.
  • For realized currency gains and losses on transfers, deposits and withdrawals, you need to make a general journal entry to the Currency Gain/Loss account.
  • The Currency Gain/Loss account is shown (linked) in Setup > Linked Accounts > Accounts & Banking Accounts window.