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What is Journal Entry For Foreign Currency Transactions



Foreign currency transactions are denominated in a currency other than the company’s functional currency. Foreign currency transactions may result in receivables or payables fixed in the amount of foreign currency to be received or paid. A foreign currency transaction requires settlement in a currency other than the functional currency! A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. This change in expected functional currency cash flows is a “foreign currency transaction gain or loss” that typically is included in arriving at earnings in the income statement for the period in which the exchange rate is changed. An example of a transaction gain or loss is when an Italian subsidiary has a receivable denominated in lira from a British customer.

Similarly, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction usually should be included in determining net income for the period in which the transaction is settled.




An exchange gain or loss occurs when the exchange rate changes between the purchase date and sale date. Merchandise is bought for 100,000 pounds. The “exchange rate” is 4 pounds to 1 dollar. The journal entry is:

[Debit]. Purchases = 25,000
[Credit]. Accounts payable = 25,000
(Note: 100,000/4 = $25,000)

When the merchandise is paid for, the exchange rate is 5 to 1. The journal entry is:

[Debit]. Accounts payable = 25,000
[Credit]. Cash = 20,000
[Credit]. Foreign exchange gain = 5,000
(Note: 100,000/5 = $20,000)


The $20,000 using an exchange rate of 5 to 1 can buy 100,000 pounds. The transaction gain is the difference between the cash required of $20,000 and the initial liability of $25,000.

Note that a foreign transaction gain or loss has to be determined at each balance sheet date on all recorded foreign transactions that have not been settled.


Another example:

A U.S. company sells goods to a customer in England on 11/15/X7 for 10,000 pounds. The exchange rate is 1 pound is $0.75. Thus, the transaction is worth $7,500 (10,000 pounds × 0.75). Payment is due two months later. The entry on 11/15/X7 is:

[Debit]. Accounts receivable—England = 7,500
[Credit]. Sales = 7,500


Accounts receivable and sales are measured in U.S. dollars at the transaction date employing the spot rate“. Even though the accounts receivable is measured and reported in U.S. dollars, the receivable is fixed in pounds. Thus, a “transaction gain or loss” can occur if the exchange rate changes between the transaction date (11/15/X7) and the settlement date (1/15/X8).

Since the financial statements are prepared between the transaction date and settlement date, receivables that are denominated in a currency other than the functional currency (U.S. dollar) have to be restated to reflect the spot rate on the balance sheet date. On December 31, 20X7, the exchange rate is 1 pound equals $0.80. Hence, the 10,000 pounds are now valued at $8,000 (10,000 × $.80). Therefore, the accounts receivable denominated in pounds should be upwardly adjusted by $500. The required journal entry on 12/31/X7 is:

[Debit]. Accounts receivable—England = 500
[Credit]. Foreign exchange gain = 500


The income statement for the year-ended 12/31/X7 shows an exchange gain of $500. Note that sales is not affected by the exchange gain since sales relates to operational activity.

On 1/15/X8, the spot rate is 1 pound = $0.78. The journal entry is:

[Debit]. Cash = 7,800
[Debit]. Foreign exchange loss = 200
[Credit]. Accounts receivable—England = 8,000


The 20X8 income statement shows an exchange loss of $200.


Which Transaction Gain Or Loss Should Not Be Reported In The Income Statement?

Gains and losses on the following foreign currency transactions ARE NOT included in earnings but rather are reported as translation adjustments:

  1. Foreign currency transactions designated as economic hedges of a net investment in a foreign entity, beginning as of the designation date.
  2. Inter-company foreign currency transactions of a long-term investment nature (settlement is not planned or expected in the foreseeable future),when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting company’s financial statements
  3. A gain or loss on a forward contract or other foreign currency transaction that is intended to hedge an identifiable foreign currency commitment (e.g., an agreement to buy or sell machinery) should be deferred and included in the measurement of the related foreign currency transaction.


Losses should not be deferred if deferral is expected to result in recognizing losses in later periods. A foreign currency transaction is deemed a hedge of an identifiable foreign currency commitment if both of these conditions are met:

  1. The foreign currency transaction is designated as a hedge of a foreign currency commitment.
  2. The foreign currency commitment is firm.

Related topic:

  • What Is A Forward Exchange Contract, And How Is It Accounted For?
  • Foreign Currency Translation
  • How To Determine The Functional Currency?
  • Accounting And Reporting For Foreign Currency



    1. Jerry

      Jan 8, 2009 at 3:39 am

      Hi, thax for ur post. that I’ve learnt a lot.

      Just a complimentary question. If the company is dealing with the foregin exchange. How the journal transaction should be recordred? would that be any difference? Should we treat the currecny as inventory? thanks

    2. Menson Jphnson

      Feb 3, 2009 at 3:48 pm

      may the Almighty God richly Bless you and I would be much grateful if you would mind sending me questions and answers on foreign currencies and Taxation. Thanks in advance.

    3. Sabar

      Sep 14, 2009 at 4:25 am

      If I am a money changer where my functional currency is USD, how does the accounting entries for GB Pound be. I am student learning book keeping. Please assist

    4. Victor

      Sep 20, 2009 at 3:21 am

      Dear Mr. Putra,
      I would be grateful if you could kindly share with us your knowledge about accounting for plain Foreign Exchange Swap.
      Company A had excess JPY in its bank account. Its reporting currency is Malaysian Ringgit (MYR).
      For example, on 1 Sep 2009, Company A entered into a FX Swap. It sold JPY95million and bought US$1million at an exchange rate of 95JPY/US$.
      As of 31 Dec 2009, Company A will have to swap the JPY back. In other words, Company A will then have to buy JPY96million and sell US$1million at an agreed exchange rate of say 96JPY/US$.
      Could you kindly let us know the accounting entries and treatment.
      Many thanks in advance.

    5. Debbie Knam

      Mar 9, 2010 at 6:58 pm

      In your first example above for a purchase of merchandise, would the foreign exchange gain of $5000 be recorded in the same section of the income statement as the merchandise was expensed to (Cost of Sales) or in another section?

    6. Raymond

      Jan 25, 2011 at 11:30 am

      I would be grateful if you could kindly share with us your knowledge about accounting for foreign exchange transaction and solving questions concerning the topic

    7. raghu gummididala.

      Mar 3, 2011 at 10:14 am

      may the Almighty God richly Bless you and I would be much grateful if you.Thanks once again.

    8. marc tams

      Oct 26, 2011 at 2:40 pm

      thanks for this. i have a job interview coming up that requires knowledge of multi-currency transactions. you’ve been most helpful.

    9. MB Rao

      Nov 28, 2014 at 6:06 am

      Many thanks, please send me more information and journal entries on Foreign currency topic.

    10. Etchu Thomas Atem

      Apr 12, 2016 at 10:53 pm

      Was so impressed with the content.

    11. Ohnmar Soe

      Jun 23, 2016 at 8:48 am

      Thank so please another transaction post on this website

    12. Peter

      Jan 12, 2017 at 9:53 am

      Hi and thanks for this particular post. I have some questions for you:
      1. What and how do determine realized losses/gains;
      2. What constitute unrealized losses/gain and
      3. Separately tell how they are reflected in income statement and their tax implications.

      My regards,

      Peter Ikenweazu

    13. abl

      Feb 2, 2017 at 9:59 am

      I have receivables in USD of 2013 still not settled. How do I adjust the forex gain/loss for this receivable account. let’s say rate on 2013 was 300 and rate at 2016 is 460. And the amount of receivable account in USD is 4,000 USD.

    14. Lin

      May 5, 2017 at 8:54 pm

      Thanks for the post.

      what entry would be when you convert the pounds to US dollar? (convert the payment in pounds to US dollar with the bank)


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