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Clearing, FX Gain/Loss, and CTA

Clearing (matching) transactions and recording foreign exchange impacts are critical accounting processes. This article explains how clearing works, how FX gains and losses are recorded, and how cumulative translation adjustment (CTA) is handled.

What is this page about

This page covers what happens when you match a payment to an invoice: how clearing links entries, how Light calculates a realised FX gain or loss against the original posting rate, when a CTA adjustment arises, and how automatic matching picks its candidates. Read it if you settle invoices in a currency other than your entity's own.

On this page

  • Clearing Explained
  • Clearing Workflow
  • Partial Clearing
  • Clearing with FX Adjustments
  • Realised vs. Unrealised FX Gains and Losses
  • FX Clearing Entry
  • CTA (Cumulative Translation Adjustment)
  • Reversing a Clearing
  • Deferred Tax on FX
  • Netting FX Positions (Manual Technique, Not an Automatic Light Feature)
  • Hedging and Clearing (Illustrative, Not a Light Feature)
  • Clearing Discrepancies
  • Automatic Clearing
  • Where FX and Clearing Appear in Your Financial Statements
  • Best Practices
  • Related Articles

Clearing Explained

Clearing is matching two GL entries to show they've been settled:

AP Example:

  • Invoice Payable posts: Debit Expense, Credit AP
  • When paid, Payment posts: Debit AP, Credit Cash
  • Both are matched/cleared to show the invoice has been paid

AR Example:

  • Invoice Receivable posts: Debit AR, Credit Sales
  • When customer pays, Payment posts: Debit Cash, Credit AR
  • Both matched/cleared to show the invoice has been collected

Clearing links the entries without modifying them, so both remain as originally posted.

Clearing Workflow

Typical clearing process:

  1. Transaction posts: the document creates GL entries
  2. Clearing happens: a second entry matches the first
  3. Both marked cleared: Light shows they have been matched
  4. Audit trail: records who cleared them and when

For example:

  • Invoice created and posted to GL
  • Bank processes payment
  • User matches invoice to payment (manually or auto)
  • Both marked as cleared

Partial Clearing

When amounts don't match exactly:

Scenario:

  • Invoice for $10,000
  • Two partial payments: $7,000 and $3,000

Clearing:

  1. First payment clears $7,000 of the invoice
  2. Invoice status becomes "Partially Cleared"
  3. Second payment clears remaining $3,000
  4. Invoice status becomes "Cleared"

GL shows all three entries linked together.

Clearing with FX Adjustments

When clearing involves FX differences:

Scenario:

  • AR Invoice posted: 100,000 EUR at rate 1.20 = 120,000 USD
  • Customer payment received: 100,000 EUR at rate 1.18 = 118,000 USD
  • FX loss: 2,000 USD

GL entries:

  1. Invoice posts: Debit AR $120,000, Credit Sales $120,000
  2. Payment received: Debit Cash $118,000, Credit AR $118,000
  3. Clearing posts an FX adjustment automatically: Debit FX loss $2,000, Credit AR $2,000
  4. AR now shows zero; the invoice and payment are cleared

The realised FX gain or loss is always calculated against the original posting rate of the invoice. Any period-end revaluation booked in the meantime uses the separate unrealised FX gain/loss account and does not change the realised amount recognised at clearing.

Realised vs. Unrealised FX Gains and Losses

Unrealised FX gain or loss

  • Occurs when an unsettled foreign currency item revalues
  • Example: AR in EUR revalues due to a rate change
  • Flows to P&L, or to OCI under IFRS
  • Reversed if the rate changes again before settlement

Realised FX gain or loss

  • Occurs when a foreign currency transaction finally settles
  • Example: you receive EUR cash at a different rate from the invoice posting
  • Final, actual gain or loss
  • Not reversed, because it has been realised

Most FX transactions have both an unrealised component during the holding period and a realised component at settlement.

FX Clearing Entry

Note: this section describes clearing when a foreign currency (or FX) difference exists. A same-currency clearing with no FX difference doesn't create any new ledger transaction, just a relational clearing event linking the two entries.

When clearing foreign currency items:

Payment entry:

  • Debit/Credit: Cash account (actual amount received or paid)
  • Debit/Credit: AR/AP account (at the payment-date rate)

FX adjustment entry (posted automatically with the clearing):

  • Debit: FX loss account, or Credit: FX gain account (the difference vs. the original posting rate)
  • Offsetting line on the AR/AP account

The FX adjustment is a separate ledger transaction linked to the clearing event, so together the entries record:

  • How much cash actually came in or went out
  • The FX impact vs. original posting
  • The cleared status of the documents

Sub-unit rounding differences from converting between transaction, local, and group currency are posted to a dedicated rounding account so the entries stay balanced in all three currencies.

CTA (Cumulative Translation Adjustment)

CTA captures translation differences between an entity's local (functional) currency and the group (presentation) currency. At clearing, Light posts a CTA adjustment when the group-currency difference on the cleared item is not fully explained by the local-currency FX gain or loss translated to group currency.

Scenario:

  • An invoice and its payment clear with a given FX difference in local currency
  • The local-to-group rate moved between posting and clearing
  • The remaining group-currency difference is posted to CTA

GL entry for CTA:

  • Debit/Credit: Currency translation adjustment account (system account)
  • Offsetting line on the AR/AP account

A CTA line always carries a nil local-currency amount, since it adjusts only the group-currency balance and represents a translation-only difference. CTA is part of equity and flows through Other Comprehensive Income (OCI). CTA is also generated at period-end revaluation for accounts carried at the closing rate.

Reversing a Clearing

If documents were cleared in error, the clearing can be reversed:

  • Reversing a clearing also reverses the FX and CTA adjustment transactions that were posted with it
  • The cleared documents return to Posted (or stay Partially cleared if other clearings remain)
  • The original entries are never modified, since reversals are posted as offsetting transactions, preserving the audit trail

Deferred Tax on FX

FX gains and losses have tax implications:

Taxable FX gains and losses:

  • Most jurisdictions tax realised FX gains and losses
  • Unrealised gains are typically not taxed until realised

Deferred Tax Accounting:

  • If financial statement shows FX loss but tax doesn't recognize it yet
  • Create deferred tax asset

Example:

  • Financial: FX loss of $10,000 (reduces pre-tax income)
  • Tax: No deduction allowed until paid (deferred)
  • Create deferred tax asset: Debit Deferred Tax Asset, Credit Tax Expense

Netting FX Positions (Manual Technique, Not an Automatic Light Feature)

Light doesn't automatically net AP against AR in the same currency, revaluation runs per balance. The following is a manual accounting technique some companies use, not something Light does for you:

For companies with natural hedges:

Scenario:

  • AP in EUR: owe 100,000 EUR
  • AR in EUR: owed 80,000 EUR
  • Net position: owe 20,000 EUR (10% of exposure)

Treatment:

  • Don't separately revalue; net them out
  • Only the net position gets revaluation entry
  • Reduces GL volatility and more accurately reflects economic position

This requires specific account structure and clearing logic.

Hedging and Clearing (Illustrative, Not a Light Feature)

Light doesn't have forward-contract or hedge-accounting tracking functionality. The following is a conceptual accounting example, not something built into the product:

For hedged FX positions:

Example: Forward contract hedge

  • AR in EUR for 100,000 EUR at rate 1.20 (posted as 120,000 USD)
  • Forward contract locked at 1.18
  • Customer pays at 1.19

Result:

  • AR realised loss: 1.20 to 1.19 = 1,000 USD loss
  • Forward contract realised gain: 1.18 to 1.19 = 1,000 USD gain
  • Net: Zero FX impact (hedge worked)

Hedge accounting matches the gains and losses for net zero impact.

Clearing Discrepancies

Sometimes clearing amounts don't match:

Possible reasons:

  • Bank fees reduced payment
  • Rounding differences
  • Partial payment
  • Data entry error

Resolution:

  1. Identify reason for discrepancy
  2. For bank fees, select Bank fees as the deviation reason, and Light creates a Bank fees journal entry for the difference
  3. FX and rounding differences are calculated and posted automatically as part of the clearing
  4. For partial payments, clear the matched amount, and the document stays Partially cleared until the remainder is settled

Automatic Clearing

Light matches imported bank transactions to your posted documents using seven built-in rules. These are active from the moment you start using bank reconciliation, so there is nothing to switch on or set up.

Light tries the rules in order and takes the first one that produces a valid match:

  1. Open sales invoice: reads the payer's reference or remittance information and matches it to an open sales invoice number. The invoice must be unambiguous, and the amount cannot exceed what is still owed. Incoming payments only
  2. Open supplier bill: the same approach for a bill you are paying. Outgoing payments only
  3. Card balance funding: recognises a transfer to one of your card balance accounts by its IBAN. Outgoing payments only
  4. End-to-end ID: matches the payment's end-to-end reference from the bank file to an existing ledger entry, where the amounts must total exactly
  5. Reference or document number: matches an extracted reference to a ledger entry's document number, at an exact amount
  6. Amount and description: exact amount and matching description text, where only one candidate exists
  7. Amount and date: exact amount on the same date, where only one candidate exists. This is the loosest rule, so Light tries it last

Any AI rules you create yourself run after all seven. Automatic matching relies on your bank transactions carrying parsed payment details and on the bank ledger account existing.

Where FX and Clearing Appear in Your Financial Statements

This section describes standard financial-statement presentation rather than specific report screens in Light.

Income statement:

  • Realised FX gains and losses as a line item, separate from operating results

Balance sheet:

  • OCI or the equity section shows unrealised FX gains and losses
  • CTA shown separately in equity

Cash flow:

  • The actual cash impacts of FX, meaning realised gains and losses. Unrealised amounts are non-cash, so they sit outside this

Notes:

  • Explain your FX policy
  • Discuss hedging strategies
  • Show FX impact by currency

For the reports you can open in Light, see FX revaluations and Multi-currency reconciliation.

Best Practices

  • Match frequently: matching daily or weekly prevents large backlogs
  • Document basis: note why amounts do not match exactly
  • Monitor CTA: track the CTA balance for foreign operations
  • Understand policy: know whether you accrue or defer FX
  • Test hedges: for hedged positions, verify effectiveness
  • Reconcile currencies: reconcile each currency separately
  • Report clearly: show FX impacts separately in reports
  • Plan for volatility: budget for FX impacts in forecasting

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