How to Record Currency Exchange Accounting Transactions
- 1). Record the foreign currency transaction using the current exchange rate. For example, on Dec. 1, 1999, World Co. purchased goods on credit for 100 Euros. World Co. paid for the goods on Jan. 15, 2000. If the exchange rate on Dec. 1 is $2 per Euro, the products are valued at $200, or 100 Euros multiplied by $2. Record the purchase by debiting inventory and crediting accounts payable for $200.
- 2). Record a foreign exchange adjustment at the end of the accounting period. Since the goods are not paid for by the end of the accounting period, Dec. 31, 1999, adjust the liability account for any changes in the exchange rate. For example, on Dec. 31, 1999, the Euro is valued at $3 – the liability has increased by $1 per euro, or $3 subtracted by $2. Debit the foreign exchange transaction loss and credit accounts payable for $100, which is 100 Euros multiplied by the difference between $3 and $2.
- 3). Record the payment of the transaction and any applicable foreign exchange gain or loss. On Jan. 15, 2000, World Co. pays for the goods purchased; the exchange rate on this day is $1.50 per Euro. The effect of the foreign exchange rate on the transaction should reflect the difference between $3 and $1.50. Debit accounts payable by $300; credit cash for $150; credit foreign exchange transaction loss for $100 and credit foreign exchange transaction gain for $50. The change in the value of the Euro from Dec. 31 to Jan. 15 eliminates the loss recorded on Dec. 31 and posts a final gain for the transaction.
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