When an organization sells a product to a company in a foreign currency and the sale and the payment are simultaneous, there is no foreign currency gain or loss because there is no change in the value of the currency between the ship date and the payment date of the order. When a foreign currency sale is made on one date and payment is received on another date, however, a gain or loss in the value of the foreign currency may occur. These gains or losses must be recorded in the general ledger.

From an accounting standpoint, there are two ways to deal with the foreign currency risk that is acquired when a foreign currency sale and payment are not simultaneous:

• One-Transaction Perspective Accounting Method
• Two-Transaction Perspective Accounting Method

The following example illustrates the effects of these two methods.

On January 1st 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 €1050. The exchange rate value of €1.05/1 U.S. dollar makes the U.S. dollar value of the transaction $1000. Company A extends a 30-day credit policy to Company B, and Company B makes a payment of €1050 on January 30th. During that time, the exchange rate between U.S. dollars and euros changed resulting in a loss on this transaction. The exchange rates of the currencies are displayed in the following table.

One-Transaction Perspective Accounting Method

The one-transaction perspective of handling gains and losses does not consider the transaction complete until the accounts receivable has been paid and converted to the default currency of the system. 

Order GL Entries

Payment GL Entries

The net effect of the order and payment transactions is reflected in the following table.

This method is not acceptable under U.S. Generally Accepted Accounting Principles (GAAP) because it does not clearly disclose the fact that Company A could have received $1,000 on January 1st but instead suffered a loss of $27.78 (1,000-972.22) due to its credit policy with Company B. In order to comply with GAAP, the gains and losses that occur due to the extension and acceptance of credit terms need to be explicitly recognized rather than buried in Sales and Accounts Receivable in the form of adjustments.

Two-Transaction Perspective Accounting Method

The two-transaction perspective considers the sale and collection of payments as two separate and distinct transactions. 

Order GL Entries

Payment GL Entries

The net effect of the order and payment transactions is reflected in the following table.

This method is considered U.S. GAAP compliant under Financial Accounting Standards Board, Statement 52, Foreign Currency Translation (FASB 52) because the gain or loss is handled in a separate account (Foreign Exchange Gain/Loss) instead of as an adjustment. Aptify posts transactions according to the two-transaction method.