Journal Entries for FX Transactions (Realized & Unrealized Gains/Losses)

Quick Answer: Foreign exchange transactions require two types of entries: (1) Realized FX — recorded when payment/receipt occurs at a different rate than the original transaction, and (2) Unrealized FX — month-end revaluation of outstanding foreign currency balances at current rates. Gains/losses hit P&L; hedging treatment changes if formally designated.

Spot FX Transactions
Month-End Revaluation (Unrealized)
Forward Contracts
Hedging vs. Speculation
Worked Examples

1. Spot FX Transactions

Recording a Foreign Currency Purchase

When you purchase goods/services in foreign currency:

At transaction date (EUR/USD = 1.10):
Dr. Inventory / Expense — $11,000
Cr. Accounts Payable (EUR) — $11,000
(€10,000 × 1.10 = $11,000)

Recording Payment (Realized FX)

When payment occurs at a different rate:

At payment date (EUR/USD = 1.08):
Dr. Accounts Payable (EUR) — $11,000
Cr. Cash — $10,800
Cr. FX Gain (Realized) — $200
(€10,000 × 1.08 = $10,800; gain on rate decrease)

2. Month-End Revaluation (Unrealized)

At each reporting date, revalue outstanding foreign currency monetary items:

Month-end revaluation (EUR/USD = 1.12, AP still outstanding):
Dr. FX Loss (Unrealized) — $200
Cr. Accounts Payable (EUR) — $200
(€10,000 × 1.12 = $11,200; $200 increase in liability = loss)

Note: Unrealized gains/losses reverse at the start of the next period. Upon settlement, the realized amount captures the full FX movement from original transaction date.

3. Forward Contracts

Initial Recognition

Forward contracts are derivatives recorded at fair value:

Entering forward contract (no entry, memo only):
Memorandum: Agreed to buy €100,000 at $1.15 in 90 days (spot = $1.10)

Mark-to-Market at Period-End

Month 1 (forward rate = $1.13, PV of forward):
Dr. Forward Contract (Asset) — $1,961
Cr. FX Gain (Unrealized) — $1,961
[(1.15 - 1.13) × €100,000 discounted at appropriate rate]

Settlement

Settlement date (spot = $1.16):
Dr. Cash — $115,000
Dr. FX Loss (Realized) — $1,000
Cr. Forward Contract (Asset) — $5,000
Cr. Gain Reversal — etc.
Without hedge accounting: runs through P&L

4. Hedging vs. Speculation

Aspect	Hedging	Speculation
Purpose	Offset existing risk	Profit from FX movements
Accounting	May qualify for hedge accounting (OCI vs P&L)	Fair value through P&L
Documentation	Requires formal designation and effectiveness testing	No special documentation
Result volatility	Matched with underlying exposure	Directly hits earnings

5. Worked Examples

Example 1: Full AR Cycle with FX

Scenario: Canadian company sells USD $50,000 to US customer.

Day 1 (USD/CAD = 1.35):
Dr. Accounts Receivable (USD) — CAD $67,500
Cr. Revenue — CAD $67,500

Month-end (USD/CAD = 1.38):
Dr. Accounts Receivable (USD) — CAD $1,500
Cr. FX Gain (Unrealized) — CAD $1,500

Day 45 - Payment received (USD/CAD = 1.36):
Dr. Cash (USD converted) — CAD $68,000
Dr. FX Loss (Realized) — CAD $1,000
Cr. Accounts Receivable (USD) — CAD $69,000
Cr. FX Gain Reversal — CAD $1,500

Example 2: Net Investment in Foreign Subsidiary

Translation of foreign subsidiary:
Dr. Translation Adjustment (OCI) — $X
Cr. Investment in Subsidiary — $X
Goes to OCI (equity) until disposal or significant impairment

Example 3: Foreign Currency Loan

Initial borrowing (EUR 1M, EUR/USD = 1.08):
Dr. Cash — $1,080,000
Cr. Loan Payable (EUR) — $1,080,000

Year-end (EUR/USD = 1.12):
Dr. FX Loss (Unrealized) — $40,000
Cr. Loan Payable (EUR) — $40,000
(Loan now worth $1,120,000; loss recognized in P&L)

Journal Entries for FX Transactions (Realized & Unrealized Gains/Losses)