With the rapid digitization of businesses that we saw in the past decade, it is now more common for businesses to do business with entities from other a different country. New technologies and well-devised business and marketing strategies make such transactions convenient and consequently, more frequent.
But equally important in such endeavors, of course, are the cash inflows and outflows involved in these business financial transactions. To explore this further, let us now go into the basics of foreign exchange accounting.
Foreign Exchange Currency In a Nutshell
Accounting for foreign currency involves keeping track of your critical business numbers in the same way that bookkeepers and financial advisers do. The financial data gathered are then collated and interpreted with a primary focus on foreign exchange rates and the price adjustments required when a foreign currency is involved.
Engaging in Foreign Exchange Accounting
Foreign exchange accounting usually takes place when an entity engages in a specific set of transactions or partnerships with another business from a foreign country that uses a different currency. Oftentimes, the deal can also take a different form. A perfect case in point is when a business sends a payment to a supplier from a foreign country that uses a different currency.
Foreign Exchange Accounting: The Practical Application
Every business, at one point or another, has engaged in a foreign exchange transaction. When the forecast exchange rate between the business' functional currency and the currency with which a transaction is made changes within a period, there will either be a gain or a loss at the point where the exchange rate changes.
For the entity, this may mean that you will have to recognize several losses or gains if the settlement date of a particular transaction extends beyond several accounting periods. Consequently, the stated balances of the related accounts receivable and payable will reflect the current exchange rate at the date when the balance sheet is prepared.
The question now is this: is it really necessary for all businesses to have a strong foreign exchange accounting system in place? If the truth be told, this is not an imperative for all SMEs. Only those that plan to engage in foreign business transactions regularly need to work out their foreign exchange accounting policies clearly.
The importance of foreign currency translation is further emphasized when looking into the actual gains and losses associated with foreign business transactions. So if you want to keep a close eye on the impact of foreign business transactions on your annual revenues, this specialized accounting process should be at the top of your list.
Do you need help with your foreign business transactions? Let our foreign exchange accounting experts help you. Get in touch with our advisers and find out how D&V Philippines can help. You can also download our free guide, Premier Solutions for CFOs
First published on 27 January 2016; last updated on 15 July 2020