The Foreign Currency Bank Account

If you have regular foreign currency transactions, you most likely have a bank account denominated in that currency. Let's have a look at how that works, using the information in the above example.

The entry to record the purchase and accounts payable is the same. The only difference happens when you record the payment. If you maintain a separate us dollar bank account, the transactions are recorded in us dollars with the exchange recorded in a separate cash account. To pay your supplier, you will write a check for us$1,000.00. The accounting entry would look like this:

         

          DR     us Accounts payable          $1,000.00

          DR     Exchange on us $ payables     529.00

          CR     us $ cash                                           $1,000.00

          CR     Exchange on us $ cas                              536.00            

          DR     Exchange loss                            7.00

This entry looks a bit complex, but break it down into what it tells you. The account is no longer payable, so you need to clear out the original payable amount (which was $1,000 in the us $ payable account and $529.00 in the exchange on us $ payable account). You cut a check for us$1,000, so the us $ bank account needs to reflect this. The $1,000 is now worth an additional $536, so this amount must be credited to the total bank amount. There was a loss of $7.00 on holding the payable, which gets expensed on the income statement.