PEV - Exchange rate variances

sunshine2010

Hi

Can someone please help - i dont see very many of these cropping into exams but just incase can someone give me an example ?

Thanks

Monsoon

Please bear in mind this answer is based on my experience in practice, I've no idea what the text books say!

The exchange rate fluctuates all the time. Say you receive a purchase invoice for $1000 and you have 60 days credit before you have to pay it. You post this in your ledger as, say £500, as that was the GBP value on using the exchange rate in force on the date of the invoice.

You pay at 60 days but, due to changes in the exchange rates (the exchange rate variance), you have to pay £600 (as any less would mean the supplier got paid less than $1000, and they have tobe paid in dollars).

You post the difference of £100 to Exchange Rate Variance in the P&L.

I hope this makes sense in respect of PEV

sunshine2010

great - thanks

the way you have explained also help me understand if i am asked a written question on this