Key takeaways
What this article covers, in order:
- The £29.82 nobody could explain
- The basics: one home currency
- A realised gain, step by step
- Unrealised gains and losses at period end
- Holding a foreign currency bank account
- Paying foreign suppliers
When you invoice or get billed in a foreign currency, you record it in pounds at the exchange rate on the day. When the money actually moves, the rate has usually changed, and the difference is a foreign exchange gain or loss, usually posted to an FX gain and loss account. A gain or loss on an invoice that's been paid is "realised". On one still open at your period end, it's "unrealised". Here's how both work with real numbers.
The £29.82 nobody could explain
Aisha runs a small translation agency in Edinburgh. About a third of her clients are in the US, and one regular client always pays in dollars. Every month, the pounds she receives never quite match the pounds on the invoice in her books. Sometimes it's a bit more, sometimes less, and every time the bank reconciliation has a little stub left over that she shoves into "sundry".
She doesn't have a mystery. She has FX differences, and they've got a proper home.
The basics: one home currency
Your books are kept in your functional currency, which for most UK businesses is pounds sterling. Every foreign currency transaction gets translated into pounds:
- When it's recorded, at the rate on that date (the "spot" rate). Some businesses use an average rate for the month if rates aren't moving much; your accountant can tell you whether that's reasonable for you.
- When it's settled, at whatever rate you actually got from the bank or payment provider.
The difference between those two pound amounts is the FX gain or loss.
A quick note on how rates are written: GBP/USD 1.30 means £1 buys $1.30. So to turn dollars into pounds, divide by the rate.
A realised gain, step by step
On 2 Nov 2026, Aisha invoices her US client $5,000 for a translation project, on 30-day terms. The rate that day is 1.30.
$5,000 ÷ 1.30 = £3,846.15. That's what goes into her sales and her debtors.
The client pays on 2 Dec 2026. By then the rate is 1.29, so $5,000 is worth $5,000 ÷ 1.29 = £3,875.97. Her bank also takes a £15.00 fee for receiving an international payment, so £3,860.97 actually lands in her account.
| Line | Amount |
|---|---|
| Invoice recorded on 2 Nov 2026 ($5,000 at 1.30) | £3,846.15 |
| Value of $5,000 when paid on 2 Dec 2026 (at 1.29) | £3,875.97 |
| Realised FX gain (£3,875.97 − £3,846.15) | £29.82 |
| Less bank charge for receiving the payment | £15.00 |
| Amount received in the bank | £3,860.97 |
Check: £3,846.15 + £29.82 − £15.00 = £3,860.97, the exact figure on her statement.
In the books, that's three separate things:
- The invoice for £3,846.15 is marked as fully paid.
- £29.82 goes to an FX gains and losses account on the P&L.
- £15.00 goes to bank charges.
Notice they're kept apart. Bank charges are a cost of doing business. FX gains and losses come from the currency moving. Lumping them together hides what's actually happening, and that's how "sundry" becomes the biggest line on the P&L.
If the pound had strengthened instead (say the rate went to 1.32), $5,000 would have been worth less in pounds and Aisha would have a realised loss. Same mechanics, opposite sign.
Unrealised gains and losses at period end
Now the trickier bit. What about invoices that are still unpaid at your month end or year end?
Under UK accounting practice, money owed to you and money you owe in a foreign currency (along with foreign currency bank balances) is retranslated at the closing rate on the balance sheet date. The difference since you recorded it is an unrealised gain or loss. It's "unrealised" because no cash has moved yet; it might reverse by the time the customer pays.
Aisha invoices a client in Germany €8,000 on 1 Dec 2026, at GBP/EUR 1.15. It's still unpaid on 31 Dec 2026, when the rate is 1.17.
| Line | Amount |
|---|---|
| Invoice recorded on 1 Dec 2026 (€8,000 at 1.15) | £6,956.52 |
| Same invoice retranslated at 31 Dec 2026 (€8,000 at 1.17) | £6,837.61 |
| Unrealised FX loss (£6,956.52 − £6,837.61) | £118.91 |
The pound strengthened, so her euros are worth fewer pounds. Her debtors go down by £118.91 and the P&L shows an £118.91 loss. When the client pays in Jan 2027, the realised figure is worked out against the retranslated £6,837.61, so the effect isn't counted twice.
Exactly how and when you do period-end retranslation (monthly or just at year end) is worth agreeing with your accountant. Many small businesses only do it at year end, and that's fine as long as it's consistent.
Holding a foreign currency bank account
If you get paid in euros or dollars often, a currency account can save conversion fees. The bookkeeping works the same way:
- The account is held in its own currency, and its balance is translated into pounds for your reports.
- When you transfer money from it into your sterling account, the pounds you receive versus the pound value in your books gives a realised gain or loss.
- At period end, the currency balance is retranslated at the closing rate, giving an unrealised gain or loss.
The upside is you choose when to convert. The downside is a bit more reconciling: you now have two bank accounts to reconcile, in two currencies.
Paying foreign suppliers
Everything above works in reverse. You enter a supplier bill for $2,000 at the day's rate, pay it at a different rate, and the difference is a realised gain or loss. If the pound weakens between bill and payment, it costs you more pounds, which is a loss.
A month-end checklist for multi-currency books
- [ ] Every foreign currency invoice and bill recorded with its currency and rate
- [ ] Each payment matched to its invoice or bill, with the FX difference posted separately
- [ ] Bank charges and conversion fees posted to bank charges, not FX
- [ ] Any foreign currency bank account reconciled in its own currency
- [ ] Open foreign invoices and bills listed, ready for retranslation if you do it monthly
- [ ] FX gains and losses account reviewed for anything odd (a huge figure usually means a wrong rate or a mismatched payment)
If you're doing forward contracts or hedging, or your FX figures start to get large, that's the point to bring your accountant in properly.
How HelloBooks helps
Multi-currency with auto FX is part of HelloBooks Pro (£14.99/month), which saves looking up rates by hand for every foreign currency invoice and bill. Pro also includes unlimited bank connections, so a currency account can sit alongside your sterling one.
Foreign payments come in through your Open Banking bank feed (most UK banks and cards) or by CSV statement import. On the reconcile screen, each statement line gets an AI match suggestion with a confidence score and a reason, and you can unmatch in one click if it's wrong. Online sellers taking payment in several currencies may find the e-commerce page useful, and there's more on bookkeeping features and pricing.
FAQs
What's the difference between realised and unrealised FX gains?
A realised gain or loss happens when cash actually moves: an invoice is paid or a currency is converted. An unrealised gain or loss comes from retranslating open balances at the period-end rate, before any cash has moved. It may reverse later.
Which exchange rate should I use?
Use the rate on the date of the transaction for recording it, and the rate you actually received or paid for settlement. Some businesses use a monthly average rate for recording if rates are stable. Agree an approach with your accountant and stick to it.
Where do bank charges on foreign payments go?
To a bank charges expense account, separate from FX gains and losses. Keeping them apart means you can see both the cost of receiving money and the effect of currency movements.
Do I need to retranslate open invoices every month?
Not necessarily. Many small businesses only do it at year end. If foreign currency is a big part of your business, monthly retranslation gives a truer picture of where you stand.
Is an FX gain taxable?
That's a question for your accountant. From a bookkeeping point of view, what matters is that realised and unrealised gains and losses are recorded clearly and separately from sales and bank charges.
Get the rate in on day one and the difference has somewhere to go on day thirty.
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