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  • Writer's pictureEH Lim

Advance payment to a supplier in foreign currency

A supplier may request a deposit or an advance payment when you place an order if you do not have a credit payment term arranged. The accounting entries get complicated when the transaction is in a foreign currency. The accounts such as the Bank, Accounts Receivable and Accounts Payable can be in a foreign currency, but the other account type such as Current Liabilities, Current Assets, etc. will only be in a base currency.

For example, assuming your base currency is in a Singapore Dollars (SGD). You place an order of USD22,500.00 at an exchange of 1SGD:0.75USD and an advance payment of USD10,000 have wired from the USD Bank account. A payment transaction will automatically record in MoneyWorks when you process the Purchase Order with "Pay Deposit for Order" process. This payment:

Debit 170.200 Advance to a supplier account (a Current Assets account): 13,333.33

Credit 130.300 USD Bank account: 10,000 Credit 130.000-~~DEL USD Bank account: 3,333.33

(The advance payment to the supplier in Singapore Dollars: 10,000/0.75 = 13,333.00)

On the following month, the exchange rate has changed to 1SGD:0.74USD and you process the Purchase Order with "Receiving Goods with Invoice" process, a Purchase Invoice with the new exchange rate will record in MoneyWorks. The Purchase Invoice:

Debit 160.100 Inventory Asset account: 30,405.41

Credit 170.200 Advance to a supplier account: 13,513.51 Credit 230.200 Accounts Payable (USD) account: 12,500.00 Credit 230.200-~~DEL Accounts Payable (USD) account: 4,391.90

(The advance payment to a supplier in Singapore Dollars which has reversed: 10,000/0.74 = 13,513.51)

The deposited amount in US Dollars has reversed out from the Advance to a Supplier account when the Purchase Invoice has recorded. Due to a different in the exchange rate between the two transactions, there is a Singapore Dollars value left in the account. Working:

  • The advance payment in Singapore Dollars: 10,000/0.75 = 13,333.33

  • The advance payment in Singapore Dollars which has reversed: 10,000/0.74 = 13,513.51

  • There is an exchange gain of 180.18 ( 13,513.51 - 13,333.33) between the two transactions.

You have to pass a journal (or a receipt to simulate a journal) to "remove" the Singapore Dollars balance in the Advance to Supplier account. The journal debits 180.18 to the Advance to a Supplier account and credits 180.18 from the Exchange Gain/Loss account.

Managing foreign currency transactions can be complex, the accountant has to ensure each account has recorded correctly after the transaction has posted.

Note: The account code and account name used in this post are for illustration, your actual account code and name used may be different.

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