Exchange Rate Variance

This Overheads code records the cost of exchange rate variance incurred in running the business. As an expense account, it normally carries a debit balance: debit entries increase the balance (recording new costs) and credit entries decrease it (for example, correcting an error or a refund received).

Real-world examples

Importer — transactional variance

An importer books a foreign supplier's invoice at the exchange rate on the invoice date, then pays it several weeks later once the rate has moved. If sterling has weakened in the meantime, settling the invoice costs more in GBP than the amount originally booked — the difference, say £45, is a debit of £45 to 7906 (Exchange Rate Variance) and a credit of £45 to 2100 (Creditors Control Account), clearing the original liability at its actual cost. No VAT is involved — an exchange difference isn't a supply in its own right.

Exporter — balance retranslation

An exporter holding a foreign-currency bank account for overseas customer receipts revalues that balance to the closing GBP exchange rate at each period end for management or statutory accounts. A weaker foreign currency at the balance sheet date than when the funds were received produces a debit of, say, £75 to 7906 and a credit of £75 to the foreign currency bank account — a different mechanism from the transactional variance above (a balance-sheet retranslation rather than a settled invoice), but the same code.

Commonly confused with

Because code 7905 (Credit Charges) sits right next to this one in Overheads, it's a common mis-posting target. Code 7906 is specifically for exchange rate variance, while 7905 covers credit charges — similar in nature, but keeping them separate is what makes the overheads section of your management accounts meaningful rather than a single lumped total.

What a mis-posting here costs you

An error posting to Exchange Rate Variance won't change total overhead spend, but it will distort the overheads breakdown that's usually reviewed line by line each month to spot cost creep.

Other codes in Overheads