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Foreign Currency Transactions and Their Effect on Accounting


The digital age has allowed the world to transition to a much more global economy, and while this is great news for business, it does bring with it some administrative considerations. When dealing in foreign currency, there are legislations that have to be followed and accounting regulations that must be adhered to. Here’s a look at foreign currency transactions and how they impact accounting in your particular industry. 

What’s a foreign currency transaction?

According to the US Securities and Exchange Commission: “A foreign currency exchange rate is a price that represents how much it costs to buy the currency of one country using the currency of another country. Currency traders buy and sell currencies through forex transactions based on how they expect currency exchange rates will fluctuate. When the value of one currency rises relative to another, traders will earn profits if they purchased the appreciating currency, or suffer losses if they sold the appreciating currency.”

If your company engages with an international company, you might enter into a transaction that is dominated by a foreign currency, rather than your functional currency. Your functional currency is essentially the primary currency used in your local economy. Some of the transactions that can be conducted include:

  • Buying or selling goods, services, or property
  • Collection of foreign receivables
  • Collection of foreign payables
  • Borrowing or lending money
  • Foreign tax credits

How does a foreign currency transaction impact accounting?

When it comes to foreign currency transactions between companies, you will need to remember three important concepts:

  1. The gain or loss is only recognised on the date the transaction is closed;
  2. Foreign currency is treated as property, rather than money with such transactions; 
  3. While the goods will be recorded at the sale price, any gains or losses on this particular foreign currency transaction will only be recognised on the payment date. 

In the real world, the value of one currency – relative to another – changes from day to day, so transactions must be recorded at the agreed-upon rate, while gains and losses are recorded on the date of the transaction. When you transact in a foreign currency, you need to record the functional currency according to that date for:

  • Each asset
  • Each liability
  • The revenue
  • The expense gain 
  • The loss

What about foreign currency and tax?

When it comes to determining the foreign tax credit on a transaction, the taxes are calculated using the average exchange rate for the taxable year. Any paid foreign taxes must be calculated at the exchange rate when payment is made. If there’s an accrual of foreign taxes, but the payment is made later in the tax year, then the foreign currency exchange rate may differ between when the taxes are paid and when the tax amount is calculated. However, if the taxes are paid within two years of being accrued, then foreign currency fluctuation between the accrual and paid rate is discounted. 

What are the benefits of foreign currency transactions?

There are many reasons to engage to transact in the forex market, but it depends on your business operations and what will work for you. Some of the reasons companies find it beneficial in going this route are:

1. Easily facilitated

Most banks have the capability to wire funds in foreign currency, so these transactions are generally conducted quickly and easily. Your bank simply applies the current exchange rate to determine what you owe when sending money. For incoming funds, your customer pays in the local currency and the bank credits your account with the equivalent amount at home.

2. Better exchange rates

If you have a good relationship with your bank, you can enjoy preferential exchange rates. You might want to consider locking in certain exchange rates on a quarterly basis so that you’re not dealing with unanticipated fluctuations later on.

3. Pricing discounts

When importers pay for goods in a local currency, suppliers often offer a lower price on goods purchased. Those who remove the exchange rate risks when converting to local currency might benefit from a discount on the transaction. 

What are some more benefits of multi-currency software?

Investing in multi-currency software for foreign exchange transactions is a smart move for your business. It not only minimises the time and hassle but also ensures you’re compliant with all accounting requirements. Some of the benefits include:

  • Setting the rate: You can adjust the exchange rate as often as business or market changes dictate.  
  • Period rates: You can set up a range of exchange rates with expiry dates for retrospective transactions. 
  • Reporting features: You can compile reports in either the home or foreign currency. 
  • Cross-currency functionality: It doesn’t matter what currency you’re using on invoicing, the system can adjust to paying in another. 
  • Real-time operation: There is no need for manual entries, the system posts in real-time which means it automatically updates and reconciles. 
  • Revalue ledgers: You’re able to revalue your sales and purchase ledgers at any time. 

Why choose Omni Accounts for foreign currency accounting?

If you’re looking to simplify the accounting process for your foreign currency transactions, then it’s worth investing in dedicated software that can assist with such multi-currency exchanges. One of the industry leaders is the Omni ERP Multi-Currency Module which allows for the management of businesses trading in multiple currencies

Some of the functions you can enjoy with Omni Accounts Multi-Currency include:

  • Creating customer, supplier and bank accounts in a foreign currency; 
  • Sending customer and supplier documents in a foreign currency;
  • Managing currency fluctuations; 
  • Importing daily exchange rates; 
  • Handling VAT on imported goods; 

Omni Accounts ERP can also create stock prices in different currencies with the nominal ledger values always retained in the home currency. Users can also print reports in the home currency or the foreign currency of the relevant accounts. Exchange rates can be set monthly, with a revaluation wizard available to revalue accounts at the latest exchange rate.

Find out more by getting in touch with Omni Accounts today.