Before moving ahead let’s understand first what is Realized Profit/Loss.
The gain or loss is based on exchange rate fluctuations between the foreign (transaction) currency and the domestic (accounting) currency at the time the payment was received or issued.
Take an example where;
- Company’s accounting currency is USD
- Purchase order is created and invoiced in INR currency with the amount of Rs. 100
- Exchange rate @ the time of PO invoicing; l USD = 10 INR
Make sure Realize gain and Realize loss account is selected @ General ledger -> Setup -> Ledger
Add new entry for exchange conversion to 1 USD = 12 INR in Exchange rate type form.
Navigate to Payment journal to make payment of above mentioned invoice.
Here we see that because of exchange rate conversion is changed from 1o to 12, system changes the cross rate to 1/12 = .08333 @ payment journal lines.
Now to make payment of Rs. 100, company has to pay only USD 8.333 (8.3333*12 = 100 Approx.) instead of USD 10, so there will be realized profit of USD 1.67.
The same logic goes with Realized loss if exchange rate would have been less than INR 10 = 1 USD.