Accounting for foreign exchange gains & losses

Written by carter mcbride
  • Share
  • Tweet
  • Share
  • Pin
  • Email
Accounting for foreign exchange gains & losses
A British company performing transactions in the euro may have foreign exchange gains or losses. (euro coins on top of euro banknotes image by Stefan Ataman from Fotolia.com)

Companies must follow the generally accepted accounting principles when accounting for foreign currency exchange gains and losses. The most common type of foreign currency exchange gains and losses occur when a company completes transactions in a foreign currency.

Other People Are Reading

Converting Foreign Currencies

Each time a company has a transaction in another currency, the accountant must convert the currency to the company's currency using the foreign currency exchange rate. This rate is found online at sources such as X Rates and Yahoo! Finance.

Record the Initial Transaction

When accounting for foreign currency exchanges, the accounting must first record the initial sale. For example, a British company buys 200 euros worth of widgets. At the time, 200 euros equals £160. The accountant would debit "Purchases" by £160 and "Accounts Payable" by £160.

Recording a Gain When Completing Transaction

If the foreign currency exchange rate changes favourably, record a gain. In the example, if 200 euros now equals £130, then debit "Accounts Payable" by £160, then credit "Cash" by £130 and "Foreign Exchange Gain" by £30.

Recording a Loss When Completing a Transaction

If the foreign currency exchange rate changes unfavourably, record a loss. In the example, if 200 euros now equals £195, then debit "Accounts Payable" by £160, "Foreign Exchange Loss" by £30, then credit "Cash" by £195.

Time To Revalue Currency

The accountant must report gains or loses on the transaction at both the end of an accounting period and when the company finishes the transaction. For example, the company enters a transaction on Sept. 1, 2009 and pays for the transaction on Jan. 31, 2009. The company must revalue the transaction on both Jan. 1 and Jan. 31.

Don't Miss

Filter:
  • All types
  • Articles
  • Slideshows
  • Videos
Sort:
  • Most relevant
  • Most popular
  • Most recent

No articles available

No slideshows available

No videos available

By using the eHow.co.uk site, you consent to the use of cookies. For more information, please see our Cookie policy.