Foreign Exchange Solution

[SantoshShrestha]

I have a query regarding the foreign exchange transaction booking.

We pay a vendor in the US in US dollars as an advance payment (Advance for 3 months work) for the services they will provide us in the coming months.
They send us the invoice monthly and the exchange rate is different so we have less expenses invoice and advance cannot be fully settled with the invoice they send us.

My question is how can we settle the advance payment with the invoices they send us as they send us a monthly invoice and the advance payment is done 3 months advance.
Should we settle it at the end of the year or every month or every 3 months using foreign exchange gain/loss account?



Many thanks in advance.

Regards,
Santosh

 

[Praz Finpoint]

I assume the Advance Payment and the Invoices are all in US Dollars, which means, from a cash flow perspective, they net to zero, in terms of settlement of the Invoices. For the impact on Profit & Loss, the exchange differences are recorded to the Profit & Loss at the time of netting-off and settlement of each Invoice against the Advance Payment, with the differences recorded as Forex Gains or Loss to the Profit & Loss at the time of settlement of each Invoice; in your case, it will be a Loss to the Profit & Loss because you paid in Advance higher than the Invoice amount, at a higher exchange rate.

 

[SantoshShrestha]

We pay fixed amount say $3000 as an advance for 3 months but our account is debited in CHF 2700 as it is a swiss company. US vendor sends us invoice monthly of same amount of $1000 but in CHF it will be around CHF 920 and different in next month.

How do we account for it??

 

[Praz Finpoint]

So per month paid in advance is CHF 900 and the Invoice billed is CHF 920 - the entry is Dr Accounts payable 920, Cr Advance Payment 900, Cr Exchange Gains and Losses 20 - you have a Forex Gain of CHF 20 since the paid amount is lower than the invoice amount