TT15 Adjustment for Currency Loss on Purchase of Fixed Assets

Typical Transaction 15

Example: For a better understanding of currency differences, in contrast with TT14 which explains a case of revaluation of the US dollar versus the pound we will use in the transaction an example of devaluation of the pound versus the US dollar.

In the course itself, Typical Transaction 15, O35F Q1, there is a devaluation of the pound versus the Japanese Yen, but we considered to compare the cases of revaluation and devaluation with the same currency, US dollar, as more illustrative of currency differences.
This in this example the US Dollar has revalued against the British Pound, from 1.7 USD per pound to 1.5 USD per pound, the original invoiced amount in has increased from £44,000 to £49,867. It means a currency loss of £5,867.

The entries for this transaction in the Accounting System can be seen here, in the AccountingLab and in the Accounting System, Operation O35F, Q1:

Accounting Equation
Adjustment for Currency Loss Increase in Creditors (+)
Decrease in Retained Earnings (-)

The table below shows the changes in TT15:

Balance Sheet Y1
Balance Sheet
Original After Changes
Current Assets 767,850 717,983
Bank 758,550 708,683
Debtors and Prepayments 9,300 9,300
Other Current Assets (Stock)  0 0
Fixed Assets 44,000 44,000
TOTAL ASSETS 811,850 761,983
Current Liabilities  44,300 300
Creditors 44,000 0
Accruals 300 300
Long Term Liabilities 0 0
Long Term Loan 0 0
Equity  767,550 761,983
Shareholders’ Equity 800,000 800,000
Income Statement -32,450 -38,316
TOTAL Liabilities + Equity + Retained Earnings 774,450 761,983

When adjusting for currency loss, 5,867, caused by a devaluation of the exchange rate GBP/USD from 1.5, the following is observed:
– Payment to Supplier of vehicles: original amount, 44,000, plus increase price due to devaluation, 5,867, a total of 49,687.
– New Cash at Bank becomes: original Cash at Bank minus payment to Supplier = 758,550 minus 49,687 = 708,683.
– Due to total payment to Creditors, 44,000 plus currency loss adjustment, Creditors become zero
– Current Liabilities decrease to 300 as Creditors have been fully paid.
– Loss in Income Statement increases by 5,866, down from -32,450 to -38,316.
– Equity reduces by the amount lost, 5,866, down from 767,550 to 761,683.