Keep a separate ledger account for each currency account, record every receipt and payment in sterling at the exchange rate on the day (or a weekly or monthly average if rates are stable), and keep the currency amount alongside. At each reporting date retranslate the currency balance at the closing rate and post the difference to an exchange gains and losses account in profit or loss, as FRS 102 Section 30 requires for monetary items.
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Why does a currency bank balance need revaluing?
The FRS 102 glossary defines monetary items as units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. A euro or dollar bank balance is the clearest example. Paragraph 30.9(a) requires foreign currency monetary items to be translated at the closing rate at the end of each reporting period, and the glossary defines the closing rate as the spot exchange rate at the end of the reporting period.
Without that step the sterling figure in the ledger is just the sum of historical conversions. A business holding $100,000 for a year could show a sterling balance thousands of pounds away from what the money is actually worth. The general rules for invoices, loans and other currency items are on the foreign currency transactions page; this page is about running the bank account itself.
How should the ledger be set up?
Each currency account needs its own nominal account, with every line holding both the currency amount and the sterling amount. Most cloud accounting packages do this automatically once multi currency is switched on. The currency column must always agree to the bank statement; the sterling column is what appears in the accounts.
Sterling here assumes the business’s functional currency is sterling. If a company’s primary economic environment is, say, the euro area, its euro account is not a foreign currency account at all and its sterling account is. See functional currency.
A useful structure is:
- one bank nominal per currency account;
- a single exchange gains and losses account in the profit and loss account;
- a written policy on the rate source and whether average rates are used, applied consistently.
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Which rate is used for everyday entries?
Paragraph 30.7 requires a foreign currency transaction to be recorded on initial recognition at the spot exchange rate at the date of the transaction. Paragraph 30.8 allows, for practical reasons, a rate that approximates the actual rate, such as an average rate for a week or a month for all transactions in that currency, but says this is inappropriate if exchange rates fluctuate significantly.
Where the bank actually converts money, for example sterling bought to top up a dollar account, the actual rate applied is known from the bank’s advice and is the right one to use for that transfer. For receipts from customers and payments to suppliers within the currency account, there is no conversion, so the business applies its chosen spot or average rate.
What happens when currency is spent or converted?
Every time currency leaves the account the sterling taken out is based on the rate used for that transaction, not the rate at which the money originally came in. Over time this leaves a sterling balance that no longer matches currency multiplied by the current rate. Some of the difference is realised, when currency is converted back to sterling at a rate different from its book value, and some is unrealised until the year end retranslation picks it up.
Paragraph 30.10 requires both kinds of exchange difference, on settlement of monetary items and on translating them at rates different from those originally used, to go to profit or loss in the period in which they arise, apart from the narrow exception in paragraph 30.13 for monetary items that form part of a net investment in a foreign operation. For bookkeeping there is no need to split realised from unrealised differences; one account is enough.
How does it work with numbers?
Illustration only. A company with a sterling functional currency and a 31 December year end opens a euro account.
| Date | Event | Euro | Rate (euro per £1) | Sterling |
|---|---|---|---|---|
| 1 March | Customer receipt | +20,000 | 1.25 | +16,000 |
| 1 June | Supplier payment | −8,000 | 1.20 | −6,667 |
| 31 December | Balance before revaluation | 12,000 | 9,333 | |
| 31 December | Retranslated at closing rate | 12,000 | 1.15 | 10,435 |
The revaluation journal is debit euro bank £1,102 and credit exchange gains and losses £1,102. The euro column is unchanged, because only the sterling value moves. If the customer receipt had settled a euro invoice raised earlier at a different rate, that receivable would have produced its own exchange difference on settlement.
In the following year the opening sterling balance is £10,435 and the process continues from there. There is no reversal of the year end entry under Section 30, though some software posts monthly revaluations and reverses them, which gives the same result provided the year end figure is at the closing rate.
What should not be revalued?
Paragraph 30.9(b) says non monetary items measured at historical cost in a foreign currency stay at the exchange rate at the date of the transaction. Stock, fixed assets and prepayments bought in euros are not retranslated at the year end, even though the cash that paid for them was. A common error is to apply the year end revaluation to every euro balance in the ledger. Deposits held for the business and amounts owed by customers or to suppliers in currency are monetary and are retranslated; advance payments for goods or services usually are not.
What has to be disclosed?
Paragraph 30.25(a) requires disclosure of the amount of exchange differences recognised in profit or loss during the period, other than those on financial instruments measured at fair value through profit or loss. Keeping exchange differences in a single dedicated nominal makes this figure easy to produce. Paragraph 30.26 also requires the presentation currency to be disclosed and, if it differs from the functional currency, the reason.
How are the exchange differences taxed?
For a company, section 483(2) of the Corporation Tax Act 2009 treats any currency held by a company as a money debt owed to the company, and section 328 includes exchange gains and losses within the loan relationships rules. HMRC’s Corporate Finance Manual at CFM61090 confirms that exchange gains and losses are calculated on foreign cash held by a company. In practice, exchange differences on a trading company’s currency bank accounts recognised in profit or loss are generally taxable or deductible as they are recognised, so the accounts figure feeds into the computation. See corporation tax explained.
Individuals and unincorporated businesses are outside these company rules. The Capital Gains Tax position on currency accounts held by individuals is covered in foreign currency and capital gains.
What mistakes come up most often?
- Entering the currency amount as if it were sterling, so €10,000 appears as £10,000.
- Reconciling only the sterling column, which hides missing or duplicated currency transactions.
- Using whatever rate appears on the day the entry is keyed rather than the transaction date or the stated average rate.
- Forgetting the year end retranslation, or retranslating at the rate on a different date.
- Posting exchange differences to the bank charges or sales account, which makes the disclosure figure impossible to extract.
- Retranslating non monetary items such as stock and prepayments alongside the cash.
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Related Accountapedia entries
- Can UK company accounts be in euros or dollars
- Translating a foreign subsidiary in group accounts
- Calculating corporation tax in a foreign currency
- Forward currency contracts in small company accounts
- Business credit card reconciliation
Related cover: Professional indemnity insurance for accountants and What professional indemnity insurance covers. For the whole practice, see insurance for accountants and fee protection schemes for your clients.
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- legislation.gov.uk: Act 2009 c. 4, section 483
- legislation.gov.uk: Act 2009 c. 4, section 328
- GOV.UK: Manual page CFM61090
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.