A number of times such a situation arises in the business where the business has to receive a schedule payment from a client in foreign currency and in the same way a business sometimes has to pay its supplier also in foreign currency. Whenever such a transaction is recognized or reported in the business activities the business must record it in the functional currency of the reporting entity. This recording is done on the biases of the exchange rate of that currency on the particular date on which the transaction has occurred. If a situation arises where it is not possible to determine the exchange rate on particular date of occurrence of transaction the next available exchange rate is used.
In certain cases there is a difference between the exchange rate of the functional currency of entity and the exchange rate of the currency in which the actual transaction in made. Under situation a gain or loss that occurs as a result of the variation in the exchange rate is recorded in that period in earnings account when the exchange rate changes. With the help of this activity a number of losses and gains can be determined in that particular accounting period where the exchange rate varies.
There are also some situations where a business must not recognize or record the gain or loss over the foreign currency transactions. Such situations arise when foreign currency transaction is actually an economic hedge of the investment made in a foreign entity. Another situation is that when there is no hope of the settlement of the transactions among those entities that are to be consolidated.
Other Related Accounting Articles: