How to Account for Foreign Currency Transactions

Accountants must account for foreign currency transactions properly under GAAP.

Accounting for foreign currency transactions has two sections. The first section is recording the original transactions. The second section is recording when the company pays or receives the money in a foreign currency. The foreign currency exchange rate will allow the accountant to translate the foreign currency to his own currency. Any changes in the foreign currency exchange rate will result in a gain or loss on the foreign currency.

Instructions

Purchases

1. Debit "Purchases" and credit "Accounts Payable" by the amount of money owed using the current exchange rate. For example, if the current exchange rate is 1 euro for $1.50, and a company purchases a product for 400 euros, then the company would debit and credit $600.

2. Debit "Accounts Payable" and credit "Foreign Currency Gain" or debit "Foreign Currency Loss" and credit "Accounts Payable" at the end of the accounting period to adjust the transaction to the current exchange rate. In the example, if the exchange rate changed to 1 euro for $1.25, then the company would owe only $500. Debit and credit $100 to adjust the $600.

3. Debit "Accounts Payable" and credit "Cash" and "Foreign Currency Gain" or debit "Accounts Payable" and "Foreign Currency Loss" and credit "Cash" when paying for the purchase. Use the exchange rate on the day you exchange the currency.

Sales

1. Debit "Accounts Receivable" and credit "Sales" by the amount of money owed using the current exchange rate. For example, if the current exchange rate is 1 euro for $1.50, and a company sells a product for 400 euros, then the company would debit and credit $600.

2. Debit "Accounts Receivable" and credit "Foreign Currency Gain" or debit "Foreign Currency Loss" and credit "Accounts Receivable" at the end of the accounting period to adjust the transaction to the current exchange rate. In the example, if the exchange rate changed to 1 euro for $1.25, then the company would receive only $500. Debit and credit $100 to adjust the $600.

3. Debit "Cash" and credit "Accounts Receivable" and "Foreign Currency Gain" or debit "Cash" and "Foreign Currency Loss" and credit "Accounts Receivable" when receiving money for the purchase. Use the exchange rate on the day you received the cash.

References

• Accounting Finance Tax: What is the Journal Entry for Foreign Currency Transactions?
• CSULB: Chapter 10 - Foreign Currency Transactions