Unrealised Gains and Losses: Definition & Examples

What are Unrealised Gains and Losses?

Unrealised gains and losses are all unsettled transactions and amounts.

Those amounts refer to any foreign currency transactions that have been recorded in the accounting records but have not yet been paid or received by the end of the accounting period.

For example, if a company based in the US (using US Dollars as their functional currency):

• Purchased goods from a supplier in Europe for €10,000 on credit in March, but does not pay them until April.
• Made a sale to a customer in Canada for CAD 15,000 in March but does not receive payment until April.

At the end of March, these foreign currency transactions would be considered "unsettled amounts" because while they have been recorded, the company has not yet paid the €10,000 liability or received the CAD 15,000 receivable.

To ensure the financial statements are up-to-date and accurately reflect any exchange rate fluctuations, these unsettled amounts need to be "revalued" at the end of each accounting period using the current exchange rates.

So using the above example, if at March 31 the exchange rates were:

1 Euro = $1.08 USD1 CAD = $0.75 USDThe company would make the following revaluation entries:

Revalue €10,000 Accounts Payable liability: Dr. Foreign Exchange Loss $800 (€10,000 x ($1.08 - $1.10 original rate)) Cr. Accounts Payable $800

Revalue CAD 15,000 Accounts Receivable: Dr. Accounts Receivable $375 (CAD 15,000 x ($0.75 - $0.73 original rate)) Cr. Foreign Exchange Gain $375

This revaluation adjusts the unsettled amounts to the newer exchange rates. When the payable and receivable are ultimately settled in April, any further exchange differences would be recorded as a gain or loss.

The key point is that revaluing the unsettled foreign currency amounts each period ensures the accounting records and financial statements properly reflect the up-to-date converted amount in the company's functional currency.