The Definitive Guide to Business Finance: What smart managers do with the numbers, Second Edition

Booking foreign currency transactions

You will recall that during the lag between invoicing and being paid, the amounts outstanding are recorded as accounts receivables. Suppose you invoice an overseas client for €1,000, and record this as an account receivable of $1,100 (i.e. €1=$1.10). If, at your end-year reporting date the rate has moved to €1=$1.08, and by the payment date it is at $1.05, you would record this as follows:

Bookkeeping entries 1 When invoice is raised Debit $ Credit $ Memo: rate is €1=$1.10; receivables are $1,100       Accounts receivable 1,100     Global widget sales   1,100

Bookkeeping entries 2 At reporting date Debit $ Credit $ Memo: rate is €1=$1.08; receivables total is now only $1080       Exchange rate losses 20     Accounts receivable ...