Does your company do business with people or entities outside of Canada? If so, you may have to report foreign currency exchanges on your financial statements. International Financial Reporting Standards (IFRS) — the entity that governs financial reporting standards in Canada — calls this process foreign currency translation, where you accurately account for foreign currency transactions on your financial statements.
Three Main Steps to Accurate Accounting for Foreign Currency Transactions
Your accounting software often has automated procedures that take into account foreign exchanges and rates of exchange from Canadian dollars into other currencies. Otherwise, you can consult with your bank or the Bank of Canada for current figures.
Take a look at three steps for accounting for foreign currency transactions that apply to businesses of all sizes:
- Translate all foreign currency items into Canadian dollars.
- Record the rate of exchange on the date the transaction occurred.
- Record the gains and losses of the translation between currencies.
This method works for direct exchanges, such as when you purchase supplies from a foreign company or a foreign company buys your goods or services. Different rules apply if you exchange stocks, assets, or inventory with a foreign entity.
An Example of Accounting for Foreign Currency Transactions
The foreign exchange accounting method works for all cash transactions, regardless of which way the money flows.
For example, you sell five hats to a business in France. You receive 100 euros for the hats. You convert those 100 euros to Canadian dollars, which comes to around $150. Your financial statement should list the transaction at $150.
There is one catch here. You probably pay a fee through your financial institution to convert the currency to dollars. Account for that on a financial statement as a business expense. QuickBooks offers an easy way to manage foreign currency exchanges in your financial accounts with the multicurrency feature. As many as 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.