Foreign currency transactions have become common for SMEs due to SaaS purchases, export income, international clients, foreign investors, and global payment gateways such as Stripe, PayPal, and Wise.
Incorrect accounting leads to:
- FX gain/loss misstatements
- Wrong revenue booking
- GST/RCM errors
- Over/understatement of liabilities
- Audit objections
- Income Tax disputes
This guide explains how to correctly recognise, measure, and adjust foreign currency transactions under using a practical SME-friendly approach.
Foreign currency transactions differ from domestic ones due to:
- Exchange rate fluctuations
- Conversion charges
- Bank/forex markup
- Settlement timing differences
- RCM implications on imported services
- Books being maintained only in INR
If not accounted properly, SMEs face:
- Incorrect profitability
- Wrong GST treatment (for services imported)
- Investor reporting issues
- Mismatched balances for foreign suppliers/customers
To provide a clear, structured understanding of how to:
- Record foreign currency purchases and sales
- Apply correct exchange rates
- Recognize realised and unrealised gains/losses
- Treat forex charges
- Adjust balances at period end
- Comply with AS 11 requirements
A foreign currency transaction is .
Examples:
- Export invoices raised in USD/EUR
- Payments to foreign vendors in USD
- Stripe/PayPal receipts
- Import of services (software, design, hosting)
- Foreign travel expenses
- International SaaS subscriptions (Zoom, Canva, AWS)
- EMI/loan payment for foreign lenders
All such transactions must be translated into INR for accounting purposes.
Any currency other than the reporting currency (INR for Indian entities).
The rate at which one currency is converted into another.
Types used in accounting:
- – on transaction date
- – on balance sheet date
- – permitted for income/expense with many small daily transactions
Balances that will be .
Examples:
- Trade receivable in USD
- Trade payable in USD
- Foreign currency loan
Not expected to be settled in cash.
Examples:
- Prepaid expenses
- Fixed assets purchased earlier (once capitalised)
- Inventory carried at historical cost
A simple, structured approach for SMEs.
USD Invoice Amount = USD 1,000Spot rate on invoice date = ₹83/USDINR Value = ₹83,000
Debtor A/c Dr 83,000
To Sales A/c 83,000
Suppose amount received through Stripe:
Amount received = USD 1,000Realisation rate = ₹82.50INR deposit = ₹82,500
Stripe fee = ₹800GST on fee = ₹144
Bank A/c Dr 82,500
Stripe Charges A/c Dr 800
GST Input on Stripe Fee Dr 144
To Debtor A/c 83,000
To Forex Gain/(Loss) A/c (?)
Difference:
- Debtor balance was 83,000
- Realised 82,500→ Forex = 500
Foreign currency differences arise due to exchange rate changes.
If loss:
Forex Loss A/c Dr
To Debtor/Bank/Vendor A/c
If gain:
Debtor/Vendor A/c Dr
To Forex Gain A/c
FX gain = incomeFX loss = expense
At year-end, outstanding foreign currency receivables/payables using the .
Outstanding receivable = USD 2,000Initial rate = ₹82Closing rate = ₹83
Increase = ₹2,000 → Forex of ₹2,000
Debtors A/c Dr 2,000
To Forex Gain A/c 2,000
If closing rate was lower → Forex loss.
When payment is finally received/paid, adjust:
Bank/Vendor/Debtor A/c Dr
Forex Gain/Loss A/c Dr/Cr
To Debtor/Vendor A/c
Foreign currency ledger should match settlement amount exactly after FX adjustment.
Examples:• SaaS tools (Zoom, Canva, AWS, Google Cloud, Mailchimp)• Foreign consultants• Domain hosting services
Treated as = RCM applies.
Forex components:
- Conversion rate
- Mark-up fee
- Collection fee
- GST on fee
- Settlement differences
All must be broken out in ledger.
Record:
- Loan at spot rate
- Interest accrual
- Interest paid
- Revaluation at year-end
Use:
- Actual conversion rate from bank
- Forex card statement
- Expense by nature (travel, accommodation, registration fees)
- Booking entire Stripe settlement as revenue
- Not separating FX gain/loss
- Ignoring revaluation at year-end
- Not accounting for forex card charges
- Recording export sales at settlement rate (wrong)—should use invoice date rate
- Claiming ITC on foreign invoices (not allowed unless through RCM)
- Not recording GST on import of services
- Incorrect TDS on foreign payments → Sec 195 violations
These cause major audit and tax issues.
| Invoice No. | FCY | INR Value | Receipt | FX Gain/Loss | Closing Balance |
| Vendor | Nature | FCY Amount | INR Value | GST Payable | ITC Eligible? |
Startup booked all Stripe receipts as revenue (net basis).FX losses not recognised.GST RCM not applied on foreign services.
• Rebuilt invoice-based revenue recognition• Extracted Stripe fees & FX components• Recorded FX gain/loss separately• Implemented RCM accounting• Established monthly FX reconciliation
• Revenue corrected by +₹34 lakh• FX loss properly recorded• GST compliance achieved• Clean audit closure
• Foreign Currency Transaction Register• FX Gain/Loss Calculator• Year-End Revaluation Template• Stripe/PayPal Reconciliation Template• Import of Services RCM Ledger• Forex Accounting SOP