Scenario for Realised Gain/Loss Using Receivables and Payables

Your company, "Tanzania Traders Ltd.," based in Dar es Salaam:

1. USD Invoice Issued to a Customer: On April 1st, 2025, you issued a sales invoice to a customer for 100 USD. At that time, the exchange rate was 1 USD = 2500 TZS. ERPNext records this invoice with a total of 100 USD, and the TZS equivalent is for reporting purposes (250,000 TZS). The Accounts Receivable for this customer is now 100 USD.

2. USD Payment Received from Customer: On April 5th, 2025, you received the 100 USD payment from the customer. The exchange rate on this date is 1 USD = 2550 TZS. You deposit this into your USD Bank Account. When you apply this payment against the sales invoice in ERPNext:

   • ERPNext will match the 100 USD payment to the 100 USD invoice.
   • However, ERPNext will recognize that the TZS equivalent of the payment at the time of receipt (100 USD * 2550 TZS/USD = 255,000 TZS) is different from the TZS equivalent recorded on the invoice (250,000 TZS).
   • The difference of 5,000 TZS (255,000 - 250,000) will be recorded as a Realized Exchange Gain. ERPNext will typically automatically create a journal entry in the background to account for this gain, debiting the Receivable account (in TZS terms) and crediting the Exchange Rate Gain account.

3. USD Invoice Received from a Supplier: On April 8th, 2025, you received a purchase invoice from a supplier for 50 USD. The exchange rate was 1 USD = 2600 TZS. ERPNext records this invoice with a total of 50 USD, and the TZS equivalent is for reporting (130,000 TZS). Your Accounts Payable for this supplier is now 50 USD.

4. USD Payment Made to Supplier: On April 12th, 2025, you paid the 50 USD to the supplier from your TZS Bank Account (having converted TZS to USD at a rate of 1 USD = 2650 TZS for the payment). When you record this payment and apply it to the purchase invoice in ERPNext:

   • ERPNext will match the 50 USD payment to the 50 USD invoice.
   • ERPNext will recognize that the TZS amount paid (50 USD * 2650 TZS/USD = 132,500 TZS) is different from the TZS equivalent recorded on the invoice (130,000 TZS).
   • The difference of 2,500 TZS (132,500 - 130,000) will be recorded as a Realized Exchange Loss. ERPNext will automatically create a journal entry, debiting the Exchange Rate Loss account and crediting the Payable account (in TZS terms).

How Realized Exchange Gain/Loss is Recorded (Behind the Scenes by ERPNext):

When you apply a payment (or receipt) in a foreign currency to an invoice in the same foreign currency, ERPNext compares the TZS equivalent of the invoice at the time it was created with the TZS equivalent of the payment/receipt at the time it was received/made. The difference is the realized exchange gain or loss.

ERPNext typically handles this automatically by creating journal entries that you might see when you examine the accounting ledger for the Receivable or Payable account or when you look at the "Exchange Rate Gain/Loss" reports.

Example Journal Entry (Behind the Scenes for the Customer Payment Gain):

• Debit: Accounts Receivable - [Customer Name] (Likely a small adjustment in TZS terms to close the receivable) - 5,000 TZS
• Credit: Exchange Rate Gain (Income Account) - 5,000 TZS

Example Journal Entry (Behind the Scenes for the Supplier Payment Loss):

• Debit: Exchange Rate Loss (Expense Account) - 2,500 TZS
• Credit: Accounts Payable - [Supplier Name] (Likely a small adjustment in TZS terms to close the payable) - 2,500 TZS

Key Takeaways for New Users (Focus on Receivables and Payables):

• Invoice and Payment in Same Foreign Currency: The realized exchange gain or loss primarily arises when the exchange rate fluctuates between the date of the foreign currency invoice and the date of the foreign currency payment.
• ERPNext Automates on Application: When you apply a payment or receipt to an invoice in ERPNext, the system automatically calculates and records the realized gain or loss. Ensure you are correctly linking payments/receipts to their respective invoices.
• Review Ledger Entries: You can see the impact of these exchange gains/losses by reviewing the ledger entries for the specific Receivable and Payable accounts involved. You will likely see small adjustments in TZS terms when the payment/receipt is applied.
• Exchange Rate Gain/Loss Reports: The "Exchange Rate Gain/Loss" reports in ERPNext provide a consolidated view of all realized gains and losses over a period. Regularly review these reports.
• Bank Transactions Might Have Separate Gains/Losses: If there's a further exchange of USD to TZS (or vice versa) involving your bank accounts, that will generate separate realized gains or losses based on the exchange rate at the time of the bank transaction.

By understanding this flow with Receivables and Payables, you can see how ERPNext intelligently handles the complexities of multi-currency transactions and automatically accounts for realized exchange rate differences, providing a more accurate financial picture for your business in Dar es Salaam. Remember to always consult with your accountant for specific guidance on your accounting practices.