When the books are closed at the end of an accounting period, balances in the receivable and payable accounts usually exist. When these balances reflect foreign currency transactions, there may be unrealized gains or losses due to the change in the value of the foreign currency. There are two approaches to handling the unrealized gains/losses:
The following example illustrates the effects of these two methods.
On December 15th Company A, which is based in the United States, sells 10 widgets to Company B whose preferred currency is euros (€). The amount of the transaction is €1,100 which corresponds to the U.S. dollar value of $1,000. Company A extends a 30-day credit policy to Company B, and Company B makes a payment of €1,100 on January 15th. Company A's books, however, need to be closed on December 31st. The following table shows the value of the euro and the U.S. dollar for the dates in this example.
Date |
US Dollar ($) |
Euro (€) |
December 15 |
1 |
1.10 |
December 31 |
1 |
1.12 |
January 15 |
1 |
1.05 |
The General Ledger (GL) entries for the sale are the same regardless of which approach is used for the ending balances.
Date |
Account |
Debit |
Credit |
December 15 |
Accounts Receivable |
USD 1,000.00 |
|
December 15 |
Sales |
|
USD 1,000.00 |