Accounting for Foreign Exchange Transactions

In this article, you will learn about how to account for foreign currency transactions undertaken by the domestic company.

A foreign exchange transaction takes place when a domestic company (such as a company in the US) enters into a transaction with a buyer or seller in another country (such as UK) to buy or sell products or services and the payments for the transaction are in foreign currency (in this case pounds).

Let’s say the US company (whose records we are preparing), books an order to supply some goods to the UK company. We have the following details:

  • The currency for the transaction is GBP.
  • The functional currency of the US company is USD.

At the time of order:

  • The total value of the order is GBP 75000.
  • The exchange rate is 1 GBP = 1.33 USD.

At the time of settlement:

  • The exchange rate is 1 GBP = 1.2 USD

The transaction will be recorded as follows:

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