Foreign Currency Exchange Gain_Losses (1).ppt

Financial advisor

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2. Exchange Rate: is the ratio of exchange for two currency.
Exchange Difference: is the difference resulting from translating a
given number of units of one currency in to another currency at
difference exchange rate.
Closing Rate: is the spot exchange rate at the balance date.
Foreign Currency: is the currency other than the functional
currency of the entity.
Functional Currency: is the currency of the primary economic of
the primary economic environment in which the entity operates.
Spot Exchange Rate: is the exchange rate for immediate delivery.
Presentation Currency: is the currency in which the financial
statement are present.
Monetary items: are units of currency held and assets and
liabilities to be received or paid in a fixed or determinable number
of units of currency.
Foreign Currency Transactions
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3. When companies use USD as its function
currency sellproducts or services to foreign
companies, and they receive USD, no special
accounting problems are presented.
Likewise, when companies buyproducts or
services from foreign companies, and they pay
in USD, no special accounting problems are
presented.
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4. Foreign Currency Transactions
However, if a company uses USD as its
function currency buysmerchandise on
account from a foreign company and the price
is to be paid inthe foreign currency(British
pounds, Japanese yen, etc.), then that company
may incur an exchange gain or loss.
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5. Foreign Currency Transactions
Similarly, if a company uses USD as its
function currency sellsmerchandise on
account to a foreign company, and payment is
to be made by the foreign company in its
own currency(British pounds, Japanese yen,
etc.), then that company may incur an
exchange gain or loss.
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6. Foreign Currency Transactions
Exchange gains and losses may be:
realized
a sale on account, or a purchase on account is
completed in oneaccounting period
unrealized
a sale on account, or a purchase on account
spans twoaccounting periods, necessitating an
adjusting entry
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7. Foreign Currency Transactions
Purchases:
When USD STRENGTHENS , it will exchange gain
When USD WEAKENS,it will exchange loss
Sales:
When USD STRENGTHENS , it will exchange loss.
When USD WEAKENS, it will exchange gain
If a company uses USD as its function currency :
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8. Foreign Currency Transactions
Example: Business Inside Co.,ltd uses USDas it’s function currency
and has the following transactions,
1. On Oct 30, 2022 purchases a computer from Japan for ¥100,000
Exchange Rate $1 = 100 ¥
2. On Nov 29, 2022 sale a computer on account to Japan
customerfor ¥ 10,000.
Exchange Rate $1 = 100 ¥
3. At year-end 2022, not yet received/paid.
Exchange Rate $1 = 90 ¥
4. On Feb 15,2023 pays to supplier.
Exchange Rate $1 = 110 ¥
5. On Feb, 20 receives from customer.
Exchange Rate $1 = 110 ¥
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9. Foreign Currency Transactions
Journal for Business Inside Co.,ltd:
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10. Foreign Currency Transactions
Journal for Business Inside Co.,ltd:
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Business Inside
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