Recording Foreigh Transactions & Foreign Currency Conversion

Accounting for foreign transactions and foreign currency translation*

If your firm agrees to receive payment in a foreign currency, you record two transactions. 

Assume that your firm signs a sales contract with Toronto Co and will be paid $1,000 (Canadian) 30 days after it receives the merchandise. On the transaction (sales) date, the exchange rate is $1 (Canadian) = $1.15 (U.S.), so you record the following general journal entry: 

Accounts Receivable	1,150
Sales	1,150

To record foreign sales transaction (1,000 x $1.15) 

However, 30 days later the Canadian currency has weakened, and the exchange rate is now $1 (Canadian) = $1.10 (U.S.). That 1,000 Canadian dollars can purchase only 1,100 U.S. dollars, not the 1,150 U.S. dollars your firm budgeted to receive. Thus, your firm incurs a loss. On the settlement date, you must record two journal entries. 

Record the payment received and the $50 loss.

Position in Canadian Dollars	1,100
Loss on Exchange	50
Accounts Receivable	1,150

 Purchase U.S. dollars for the Canadian dollars your firm received.

Cash	1,100
Position in Canadian Dollars	1,100

Had the Canadian dollar strengthened after the settlement date, Toronto Co’s payment would purchase more U.S. dollars than you had budgeted for, resulting in a gain. You would then have recorded the following entries:  

Position in Canadian Dollars	1,250
Accounts Receivable	1,150
Gain on Exchange	100
Cash	1,250
Position in Canadian Dollars	1,250

*Excerpted from the AIPB newsletter; author - Dr. Suzanne N. Cory, Ph.D., Professor of Accounting, Bill Greehey School of Business, St. Mary’s University, San Antonio, TX.