Currency profit and loss: how to calculate and report?Barry Copeland 21 / November / 23 Visitors: 62
Compared to other financial markets, Forex markets are different from other financial markets. While in the case of an equity investment, you can say that it is simply a bet on a company, a currency position is a bet on the overall value of a currency relative to other currencies.
For example, if you believe that the euro will have a higher value, you won't just buy euros. You will have to look for other currencies against which you think the euro will appreciate well. So, you can buy EUR/USD, which can actually be called a bet that the euro will appreciate well against the US dollar.
What is profit/loss in currency exchange?
Before we can calculate profit or loss in Forex, we must have a clear idea of profit/loss. When someone sells any type of services or goods in a foreign currency, there is a possibility of profit or loss. The total value of the foreign currency converted into the currency of the local seller changes depending on the prevailing exchange rate. When the value of the currency increases after conversion, the seller makes a profit in the foreign currency.
However, when the value of the currency after conversion decreases, the seller incurs a foreign exchange loss. If the current exchange rate cannot be determined when recognizing the transaction, the available exchange rate is also used to calculate the translation result.
Gains/losses on foreign currency transactions - realized and unrealized
Realized gains and losses are gains and losses that are completed. This means that the buyer has already settled the invoice before the end of the accounting period.
Foreign exchange gains are recognized in the income statement under revenue.
Unrealized gains and losses that the seller expects to receive as the invoice is paid, but the buyer does not pay the invoice after the end of the accounting period. The seller has calculated gains and losses that will remain when the buyer pays the invoice at the end of the accounting period.
Unrealized gains or losses are recorded in the balance sheet under equity.
Accounting for Forex gains/losses
When preparing annual financial statements, companies should reflect their transactions in local currency so that all interested parties can read all financial statements in a simple way. This means that all foreign currency transactions must be translated into the local currency at the current exchange rate at the time the transactions are recognized.
Although the small mathematical scheme of calculating foreign currency transaction gain or loss may seem complicated, but calculating foreign currency transaction gains and losses is similar to converting one currency into another from time to time.