Foreign Exchange Gain Journal Entry

Foreign exchange gains incur when the business conduct business in other currencies and these currencies fluctuate in the favor of the company’s functional currency.

Foreign exchange refers to the process of converting one currency into another. This can be done for a variety of reasons, including trade, investment, and settlement of accounts receivable/accounts payable.

In order to buy foreign currency, individuals must first sell their domestic currency in the foreign exchange market. The rate at which currencies are exchanged is determined by a number of factors, including interest rates, inflation, and political stability.

Exchange rates can fluctuate rapidly, so it is important to monitor the market carefully before making a transaction. Although it may seem complicated, foreign exchange is an essential part of the global economy. Understanding how it works can help you take advantage of opportunities and avoid potential losses. The foreign exchange market is the market in which currencies are traded. The purpose of the foreign exchange market is to help international trade and investment by allowing businesses to convert one currency to another.

When the company makes a business transaction, the accountant will record it in the financial statement. The recorded amount will depend on the exchange rate on the transaction date which we call the spot rate. The customers may decide to settle the transaction on the other date with different rates. A new rate can create gain/loss to the functional currency.

Journal Entry for Foreign Exchange Gain

The company record accounts receivable when selling goods or services on credit to the customers. If the sale is made in other currencies, the transaction needs to be covert to functional currency and recorded into a financial statement.

The journal entry is debiting accounts receivable and credit sales.

Account Debit Credit
Accounts Receivable 000
Sale 000

The customer will make a payment based on the credit term. The payment amount will depend on the invoice amount which is in other currencies. On the payment date, the exchange rate can be different, it can generate gain or loss to the company.

If it is a gain, the journal entry is debiting cash and credit accounts receivable, gain on exchange rate.

Account Debit Credit
Cash 000
Accounts Receivable 000
Gain on Foreign Exchange 000


Company ABC is a manufacturer that sells products over the world. The company has sold goods that cost EUR 15,000 to a customer in Europe, while the exchange rate is 1 EUR = 1.15 USD.

The customer makes payment on the due date when the exchange rate is 1 EUR = 1.20 USD. ABC use the USD as the functional currency. Please prepare a journal entry for gain on the exchange rate.

When ABC sell goods to customer, it needs to convert the amount to USD and record it.

Sale amount = EUR 15,000 x 1.15 = USD 17,250

This is the amount that needs to report on the financial statement.

The journal entry is debiting accounts receivable $ 17,250 and credit sale $ 17,250.

Account Debit Credit
Accounts Receivable 17,250
Sale 17,250

The customer will settle base on the invoice amount which is EUR 15,000. However, on the payment date, the USD amount is higher due to the exchange rate.

Amount receive = EUR 15,000 x 1.20 = USD 18,000

It will generate a gain of USD 750 (USD 18,000 – USD 17,250)

The journal entry is debiting cash $ 18,000 and credit accounts receivable $ 17,250, Gain on exchange rate $ 750.

Account Debit Credit
Cash 18,000
Accounts Receivable 17,250
Gain on Foreign Exchange 750