In essence, a functional currency is your main currency that you use in your business or unit of a business. Normally it\u2019s expected to be the principal currency used in the economic environment the entity operates (generates and expends cash).<\/p>\n
Now as it happens, businesses often encounter foreign currencies in their business \u2013 either buying from foreign companies or accepting currencies from clients. No matter the case, there are general treatments required if you\u2019ve got transactions in foreign currencies.\u00a0<\/p>\n
First things first, your accounting is done in functional currency. In case you have a foreign currency transaction, you should use the transaction date exchange rate to translate the transaction into your functional currency into your statements. For an example, let us say that you got services for 100 USD and your functional currency is EUR. Presuming now that on the transaction day the exchange rate is 1 USD = 0.8 EUR, your expense on the income statement is 80 EUR (100 x 0.8 = 80). As such however, you either need to have USD on your bank account or you need to exchange some EUR for USD through the bank.<\/p>\n
With all the balances nominated in foreign currencies, you need to translate them into your functional currency using the rate effective on the balance sheet date. For an example, your client is normally paying in USD and at the balance sheet date, there\u2019s a balance outstanding that\u2019s 100 USD. Now using the same rate as we had above as the balance sheet rate, the balance in your functional currency should be 80 EUR.<\/p>\n
Note also that all the profits and losses arising from those translations are part of your income statement for the period.<\/p>\n","protected":false},"excerpt":{"rendered":"
In essence, a functional currency is your main currency that you use in your business or unit of a business. Normally it\u2019s expected to be the principal currency used in the economic environment the entity operates (generates and expends cash). Now as it happens, businesses often encounter foreign currencies in their business \u2013 either buying […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,73],"tags":[],"class_list":["post-4212","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-18-foreign-currency"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4212","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=4212"}],"version-history":[{"count":2,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4212\/revisions"}],"predecessor-version":[{"id":4215,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4212\/revisions\/4215"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=4212"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=4212"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=4212"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}