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.
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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.
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