Foreign Exchange Gain and Loss

Why is Foreign Exchange Gain and Loss account showing loss when the amount in USD and AED mentioned correctly as per the actual exchange rate charged.

See the below snap shot of the account

The USD amount received is $1,386.62
Exchange rate was 0.271886
Amount in AED for the Sales Invoice was AED 5,100

Receive money is as below snap shot:

Why Manager is taking its own conversion rate and showing me loss of AED 11.49

I have not set conversion rate in Manager as our inward and outward rates are different.
So, its not advisable to enter the exchange rate as in a same date we have inward and outward transactions.

Foreign Exchange Gain and Loss is unnecessary showing loss in our 2017 year books, which affects our P&L Financial of company.

How to get rid of this ledger.

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You cannot if you use more than one currency. It is automatic.

It is necessary. That’s why it is automatic.

It is not. You entered an exchange rate of 0.2725 at some time. Nothing appears in Foreign exchange gains (losses) until you enter a second, different rate. The fact that you can drill down to see the forex report you posted shows that you have done this.

Further diagnosis requires more information. Can you post screen shots of:

  • Your exchange rates list under Settings
  • The entire receive money transaction, including the bank account the transaction was transacted to and the account the line item was posted to. (obscure any sensitive information)
  • Your list of accounts under the Bank Accounts tab (obscure any sensitive information, including amounts, but be sure to show the currencies applicable to the balances)

If you enter a Sales Invoice at an exchange rate of 0.2725, and
Enter that invoice’s received payment at an exchange rate of 0.271886
Then there must be an exchange gain / loss to balance between the two transactions.

E.g. When you create a foreign currency Sales Invoice then Manager creates an “estimation” based on the Settings > Exchange Rates of what you expect to receive, say AED 5100 & USD 1400. But if the "actual’ that you received is USD 1380, then Manager has to adjust that “estimation” by USD 20, hence the exchange gain & loss.

Going further along the line of what @Brucanna has said, it is worth noting that you only had the option to enter both USD and AED amounts on the receive money transaction because you received the money in an account denominated in USD instead of your AED base currency. Had you entered a receipt in a bank account denominated in AED, that field would not have appeared.

So you forced an exchange rate to fit the transaction that was different than the 0.2725 you had created under Settings. The difference was taken up as @Brucanna described.

If you had left the 0.2725 exchange rate in place and not filled in the optional AED field for the receive money transaction, the forex difference would not have appeared. But that doesn’t mean it would have gone away. It just would not yet be recognized. Later on, when you took money out of the USD-denominated bank account, any gain or loss would still be recognized based on movement in exchange rates. Those differences have to be recognized at some point. That is why I told you the Foreign exhcange gains (losses) account is automatic. It appears when it is needed to balance your books.

As I have clearly mentioned, I have never entered any exchange rate under settings.
Find the snapshot below:

Hence, my query was from where Manager is taking its own conversion rate?

As per our internal process, we have a fixed exchange rate for USD for our customers.

Its 1 AED = 3.878 USD / 1 USD = 0.2718 AED

So, when we quote the Customer AED 5,100, In USD we expect the client to pay USD 1386.62 in our USD account. Which the customer paid too.

Hence, in the payment section (Receive Money in USD Bank Account) I have specified AED 5,100

But why is Manager showing me loss of AED 11.49

Sorry for the Typo.

1 AED = 3.6780 USD
1 USD = 0.2718 AED

When you download Manager it has an inbuilt default exchange rate as you can’t have zero inter currency rates when you first activate the Base Currency feature.

Then you need to set that rate up under Settings > Exchange Rates so that all transactions will relate to that rate and not the default rate - use a date prior to the first transaction

Yes, you did mention this briefly in your first post, where you wrote:

Unfortunately, because of your further discussion about different inward and outward rates on the same date, I interpreted your statement to mean you did not enter an exchange rate for the day of this transaction. It never occurred to me that you might not have ever entered any exchange rates at all. That’s why I asked to see your list of exchange rates. I thought that list would be the key to understanding your situation. I did not recognize the 0.2725 rate as the default rate because there is no listing available of those default rates. I mistakenly assumed that was a rate you had entered for some previous transaction(s). I apologize for my misunderstanding.

Now that all circumstances have been mentioned, I see what happened and why. If, as @Brucanna suggested, you enter your actual exchange rate for a date preceding the transaction, the contribution to Foreign exchange gains (losses) will disappear. (Note, however, that the actual rate for the numbers you listed is 0.27188627. If you are not exact, you will still have a small gain/loss.)

Of course, entering this rate may affect other transactions at different rates. So you will still probably have some forex gains/losses. The only way to avoid that is to either deal in only one currency or always have the same exchange rate for a currency for all transactions in both directions. Since this will probably never occur, the account is necessary and automatic.

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Thank you so much for understanding my situation with my books.

However, we cannot deal only in one currency as we have two bank accounts ( AED and USD)
Nor can i have a same exchange rate fixed as we incur a different rate for inward and outward remittance.

Hence, my request was to know if Manage can allow me to switch off the Foreign Exchange Gain and Loss Ledger altogether so as to not have my books show a loss for the given financial year as we in actual are not making any loss.

This loss in the books is highly affecting our Company Valuation which are audited every year.

I need a solution to get rid of this as we are not making any loss in reality.

If you must deal in two bank accounts with different currencies then you CAN"T switch off the Foreign Exchange Gain / Loss.

In Manager you can only have one exchange rate being applicable at any one point in time, therefore if you use different rates for inward and outward then you should establish a mid rate.

Alternatively, instead of invoicing your customer in AED (5100), set up the customer as USD and invoice them in USD (1,386.62), then when that invoiced is paid into the USD bank account, no foreign exchange variance will occur.

Sales Invoice in USD

Summary tab

Receive Money in USD

Summary tab

I very much doubt this because any loss being shown is only an indication that your income accounts are equally overstated to the same amount. If the loss figure happens to be that large then either 1) the exchange rate being used is not realistic or 2) there has been a very substantial exchange rate movement within transactions… A very realistic exchange rate (near actual) would only give you very minor forex variances, so would have very little impact on any valuation.

The loss is not an “actual” loss but a valuation “adjustment” figure between two transactions - the Sales Invoices vs the receipts for those sales invoices…

I have already told you three times the account is automatic, so it cannot be turned off. More importantly, the adjustments made are necessary if you account the way you have been. And any auditor will know this. The absence of a forex gain/loss account would raise the suspicion of fraud.

I had so far avoided the question of why you are invoicing in AED and being paid in USD. A much more normal situation for foreign customers is to invoice in the currency in which you will be paid, as @Brucanna described. Be aware that Manager will convert the foreign bank account and Accounts receivable into AED on your balance sheet according to exchange rates you enter for the date. Otherwise, your books would not balance.

But is it okay for an accounting software to show a loss (wrong figure) despite the actual amount received as per the exchange rate from the customer in our Bank is correct.

The customer paid the exact amount as per our conversion rate. Why should Manager take its own conversion rate despite entering the USD and AED amounts in the receipt.

We file the Bank Remittance advice with the auditors which clearly mentions the exchange rate a bank charges. So clearly there is no loss at our end but the software shows a loss. So rule out the suspicious of fraud.

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AED account is our main account where we pay from to our international vendors. Vendors Invoice us in USD.
So Vendor’s are set to AED currency and we pay from our AED account. (No foreign exchange gain or loss issue)

However, Customer’s would want to pay in AED or USD.
We Invoice them in AED but receive money in our USD account. ( Here we incur foreign exchange gain or loss issue)

Moreover, UAE VAT is going to be implemented from 1st Jan 2018.
We have to Invoice in AED to show the VAT payable in AED
In such scenario, i am defiantly going to incur this issue.

Yes. Not only is it OK, it is necessary because different exchange rates are involved. Whenever conversions occur, they are at a given rate, no matter how the rate is determined (default, entered, contractual, per bank transaction, etc.). When figures are expressed in a different currency, there will unavoidably be gains and losses as rates change. In international investing, this is referred to as currency risk. While you can take different approaches to suppress the appearance of the forex gains/losses, eventually they will show up somewhere. Your auditors will understand this fact.

That may be, but you invoiced in one currency and received money in another. So you cannot avoid forex gains/losses in the long run. As I said above, you can suppress them for a while, but that is only hiding the reality, not changing it.

Because it needs an exchange rate for conversion of USD balances (such as in you USD bank account) to your base AED currency. When you force the exact amount by entering the optional second currency, and it doesn’t match the stored exchange rate, the difference must be made up somewhere. That somewhere is the Foreign exchange gains (losses) account.

That may be, but the bank’s rate is almost never going to match the contractual rate you and your customer are using. Thus, the need for the account.

The software shows an adjustment to income, not a true loss, which can be positive or negative depending on prevailing exchange rates. (Yes, I know, it is referred to as a gain or loss for convenience.) This is necessary so true profit or loss can be shown in your base currency. This is because you can’t add and subtract USD and AED from one another. You must use an exchange rate to make one equivalent to another. And when exchange rates differ over time or between your contractual rate and the bank rate, adjustments are necessary. Again, your auditor knows this. The suspicion of fraud will arise if you don’t show the adjustment. The auditor will ask what happened to it.

This makes no sense. If suppliers (vendors) invoice you in USD, you should set them up in USD and pay from your USD account. That is the way to avoid forex gains/losses on purchase invoices and related payments. (Of course, when you need to transfer money to/from your USD account from your AED account, they come back into play again.)

You can do it this way if you want. Notice that I said it would be more normal to set up customers who pay in USD in that currency. But it is not required. Making this choice, you cannot avoid the possibility of forex gains/losses if you insist on using your contractual exchange rate instead of an actual rate.

@Sarika, you don’t seem to want to let this issue go. I understand that it is complicated to understand. But foreign exchange is complicated, especially since every institution uses a different buy and sell rate and those rates fluctuate by the minute. I sympathize with the frustration it causes. But I don’t know what else to say except to encourage you to trust the software. Thousands of users in many dozens of countries are using the multi-currency features of Manager. While some ask for more sophisticated reports or the ability to convert customers and suppliers from currency to currency, no one complains that the arithmetic is wrong. The very nature of double-entry accounting ensures that such errors would be immediately obvious.

Yes, but “your” conversion rate is external of Manager.
For Manager to know about “your” external conversion rate you need to tell Manager via Settings > Exchange Rates “your” conversion rate.

Yes the USD (1,386.62) and AED (5,100) amounts were entered into the receipt, however, that’s all they were - “figures” entered into a receipt. Those figures don’t create an exchange (conversion) rate. The establishing of exchange (conversion) rates can only be done under Settings.

The inbuilt exchange rates are setup just so there is a starting point, which “you” can override to suit…

You keep seeing the figures as absolute values instead of being valuations.
The customer banks 1400 USD into your USD bank account which you give an AED valuation of 5100 for that day. However, those exact same USD dollars may need to be re-valued as to their AED worth as the USD/AED rates fluctuate.

The Bank Rate is the what the customer paid.
We Invoiced AED 5,100 and received USD 1386.62. Bank Rate was 3.6780 (USD1386.62 x 3.678 = AED 5,100)
So, there is no gain nor loss. Simple as that.

This is what caused the gain and loss in my books.
As i clearly cannot set a fix exchange rate as my inward and outward rate differs.

If there was a way to set the rate for receive money and spend money on a given date under settings, then my issue could be resolved.

Anyways, I clearly see this discussion going nowhere.

Thanks anyways.

Yes, and as explained umpteen times, adjust the Settings > Exchange rate to match that same rate and you will have no gain or loss - that simple.

No, this wouldn’t resolve your issue because as soon as you set a different receive / spend rate for a new given date then you will be back exactly to where you are now - having a forex gain / loss.

On Dec 1 you receive USD 1400 at a bank rate of 3.64285 for AED 5100
On Dec 15 you receive USD 1380 at a bank rate of 3.69565 for AED 5100
So if you could set the receive rate to match the Dec15 (3.69565) then the entire USD is “valued” at that.

Therefore as at Dec 16 the entire USD 2780 doesn’t equal AED 10200 but would equal AED 10273.91 (2780 x 3.69565) so there would become in your accounts a forex gain of 73.91 as that represents the change in valuation of the current USD holdings.

So perhaps you need to enter a number of different transaction, instead of just focusing on the one transaction. Set under Settings a fixed rate, midway between your receive and spend rates and see the impact over those transactions. A properly set exchange rate should give you very minor gains & losses, you may even end up with a gain overall - a positive impact on the business valuation.