Unrealised Currency Gains in Xero: why your profit moved when nothing was paid

Short answer: if you invoice, buy or bank in a foreign currency, Xero turns those amounts into your own currency at the exchange rate on the day you enter them. While an invoice or bill is still open, or money sits in a foreign currency bank account, Xero recalculates it at the rate on the date of your report. The difference shows on the Profit and Loss as Unrealised Currency Gains (open invoices and bills) or Bank Revaluations (foreign currency bank accounts). It is a paper gain or loss: no money has moved. When the invoice or bill is paid, the real difference goes to Realised Currency Gains, and the paper figure for that invoice disappears.

So a month where profit jumps or dips for no obvious reason, in a business with overseas customers or suppliers, is often the exchange rate, not trading. These lines only appear if multi-currency is switched on, which is only on Xero’s higher plans. Menu names move between Xero releases; if a label below does not match your screen, search Xero Central for “foreign currency gains and losses”.

The three lines, side by side

Line on the Profit and Loss	What it comes from	Has cash moved?
Unrealised Currency Gains	Foreign currency invoices and bills that are still unpaid, revalued at the report date	No
Bank Revaluations	The balance of a foreign currency bank account, revalued at the report date	No (you hold the same foreign money; it is worth more or less in your currency)
Realised Currency Gains	Invoices and bills that have been paid at a different rate from the one they were entered at	Yes: you received or paid more or less in your own currency than the invoice said

A negative figure on any of these lines is a loss. Xero works the unrealised figures out when you run the report, so they change with the report date even though nobody has entered anything.

A worked example: one month of a design studio

An Australian design studio (Australian dollars are its own currency) works for a US client. For simple numbers, assume the Australian dollar buys 0.6400 US dollars at the start of September and 0.6250 on 30 September: the Australian dollar got weaker, so every US dollar is worth more Australian dollars.

Item (in US dollars)	Entered at 0.6400	Worth at 0.6250 on 30 September	Paper gain or loss
Invoice to the US client, USD 10,000, unpaid	$15,625.00	$16,000.00	+$375.00
Bill from a US software supplier, USD 2,000, unpaid	$3,125.00	$3,200.00	-$75.00
US dollar bank account holding USD 5,000	$7,812.50	$8,000.00	+$187.50

The September Profit and Loss shows Unrealised Currency Gains of $300.00 (the invoice’s $375.00 less the bill’s $75.00) and Bank Revaluations of $187.50. Profit is $487.50 higher than the work done in September justifies, and not one extra dollar has arrived. The studio still holds exactly USD 5,000 and is still waiting for the same USD 10,000.

On 20 October the client pays the USD 10,000, and the rate that day is 0.6500. The studio receives $15,384.62, which is $240.38 less than the $15,625.00 the invoice was entered at. That -$240.38 goes to Realised Currency Gains. Run a Profit and Loss for September and October together and the invoice’s $375.00 paper gain is gone, because the invoice is no longer open: the only currency effect left from it is the real $240.38 loss.

That is the trap. An owner who read September’s report as “a good month, $487.50 better” and spent accordingly was spending a gain that turned into a loss three weeks later.

How to read it in your own Xero

1. Find the lines. On the Profit and Loss, look for Unrealised Currency Gains, Realised Currency Gains and Bank Revaluations. Click a figure to see what is behind it where Xero allows it.
2. Run the Foreign Currency Gains and Losses report (under Reports). It lists the gain or loss per currency and per invoice, bill or bank account, so you can see which open items are driving the number.
3. Judge trading without them. Take net profit and subtract Unrealised Currency Gains and Bank Revaluations. What is left is the business’s result before paper exchange movements. Realised Currency Gains are real money, so leave them in.
4. Look at the open foreign currency amounts. Aged Receivables and Aged Payables show what is still unpaid in each currency (who owes you money). A large unpaid foreign invoice is a large exposure: every cent the rate moves changes your profit until it is paid.
5. Check the report date. A Profit and Loss to 30 September and the same report run “as at today” can show different unrealised figures for the same month, because the rate is taken at the report’s end date.

Three traps

• Comparing months. A month with a big unrealised gain followed by a month where it reverses looks like a drop in profit (why did my profit drop?). Strip the unrealised lines out before you compare.
• Paying yourself or tax from a paper gain. Unrealised gains are profit on the report but not cash in the bank (profit but no cash). How exchange gains are taxed depends on your country and situation, so ask your accountant before you set money aside or draw it.
• An empty foreign bank account that still moves. If a foreign currency account is emptied by a transfer, Xero can leave a small balance in your own currency that keeps being revalued each month. Ask your bookkeeper to look at it rather than coding the difference away yourself.

The Profit and Loss itself is explained line by line in how to read a profit and loss in Xero, and the Profit and Loss detail guide shows how to see the transactions behind any line.

Common questions

What are unrealised currency gains in Xero? The gain or loss on foreign currency invoices and bills that are still unpaid, worked out by revaluing them at the exchange rate on the report date. They are on paper only until the invoice or bill is paid.

What is the difference between realised and unrealised currency gains? A realised gain or loss happens when money actually moves: the invoice was entered at one rate and paid at another. An unrealised gain or loss is the same calculation for something not yet paid, using today’s rate instead of the payment rate.

What is Bank Revaluations in Xero? The gain or loss from revaluing the balance of a foreign currency bank account in your own currency. You hold the same amount of foreign money; it is just worth more or less in your currency.

Why did my profit change when I did not enter anything? If you have open foreign currency invoices, bills or a foreign bank account, the exchange rate moved. Xero recalculates the unrealised figures whenever you run a report, so the same month can show a different profit on a different day.

Do unrealised currency gains affect my cash? No. Your bank balance in the foreign currency does not change, and no customer has paid any more. Only realised gains, at the moment of payment, change how much money you have in your own currency.

Can I turn unrealised gains off? Not if you use multi-currency: Xero calculates them for every open foreign currency item. You can read profit without them by subtracting the Unrealised Currency Gains and Bank Revaluations lines.

Will the unrealised gain become real? Only if the rate on the day you are paid is the same as on the report date. In the example, a $375.00 paper gain turned into a $240.38 real loss because the rate moved again before the client paid.

See what actually moved, every Monday

A paper exchange gain can make a quiet month look good. ReportPilot reads your Xero figures and emails you every Monday in plain English: how last month’s profit compared, which line drove the change, and how many months of cash you have, so a jump that came from one line is named rather than buried in the total. It does not change anything in Xero: it asks for read-only access, and there is a 14-day free trial with no card.