Occasional Foreign Currency Transactions

If your business has only the occasional foreign currency transaction, you probably do not maintain a bank account in that currency. For example, say you are located in Canada and you bought a one­time shipment of goods from a us vendor. You would probably The exchange account is a liability account, just like the rest of the payables. Separating the us dollar payable from the exchange allows you always to be able to track the original billing amount in the us dollar accounts payable account.

In this situation, you need to track the original us dollar amount of the purchase until you pay it. Problems arise when the relative values of the us and Canadian dollars change during this period.

Let's look at an example: You have purchased us$1,000.00 worth of goods from a supplier in North Carolina. You will pay them in 30 days. The us dollar exchange rate is 1.529 on the date of purchase. You need to record the transaction in Canadian dollars, as that is the currency in which you are reporting. When you take possession of the goods, you will make the following entry:

 

          DR     Inventory                       $1,529.00

          CR     us Accounts payable                        $1,000.00

          CR     Exchange on us $ payables                   529.00

The exchange account is a liability account, just like the rest of the payables. Separating the us dollar payable from the exchange allows you always to be able to track the original billing amount in the us dollar accounts payable account.

The other side of the entry (in this case, inventory, but in other cases, it could be an expense account) records the full value of the transaction on the date of purchase. Purchases and sales are recorded at historical rates, so you will never revalue this part of the entry.

Thirty days later, you pay your supplier. The us dollar exchange rate is now 1.536, so you know that the bank will withdraw $1,536 to cover the us$1,000 draft. However, there's only $1,529 in accounts payable. How do you account for the difference?

The difference represents the loss on the transaction. Had you settled the bill on the day you purchased the goods, you would have had to pay only $1,529. But because you waited 30 days, the exchange rate changed and now you must pay more. The entry to record the payment is ­

 

          DR     Accounts payable             $1,529.00

          CR     Exchange loss (expenses)          7.00

          CR     Cash                                                    $1,536.00

You do not have to record the us portion of the cash separately, as the bank is doing the conversion directly. When you receive your bank statement, it will show only the $1,536. This amount will match your entry.