Foreign Currency Transactions: Concepts, Examples, and Journal Entries

This essay provides an overview of foreign currency transactions, defining them as dealings in currencies not local to the banking office's country. It illustrates the impact of exchange rates on importing and exporting goods, using examples of Australian companies trading with Japan. The essay further explains lending and borrowing scenarios involving US and Australian companies, including swap contracts to manage currency exchange. Journal entries for initial recognition, end-of-reporting-period adjustments, and profit and loss recognition are also presented. The discussion highlights the importance of understanding exchange rates and their effects on international business operations.

FOREIGN CURRENCY
TRANSACTIONS

INTRODUCTION
Foreign currency transaction can be
understood as a dealing in which
denomination of currency is not local and
based on the country where banking office is
present. Thus, in foreign exchange
transactions, two different nations are
involved (Kenen, 2011).

Importing goods from overseas
For instance, if AUD's value is stronger than any
other country from which it is exporting goods, then
it will be in beneficiary position as it will be cheaper
for Australian company. Say for example an
electronic item is imported by Australia from Japan.
So, exchange rate is 1AUD is equal to 82.93
Japanese yen. So, Australia holds a stronger value
because of which it can import goods in cheaper
value.

Exporting goods to overseas
destination
For instance, a cloth retailer of Australia exports a
garment priced at 10AUD in Australia to Japan. If
the exchange rate is 82 Japanese yen to AUD the
item will cost to the Japanese company in 820 Yen.
If the value of AUD increases to 10% then its price
will be increased more for Japanese organisation.

Lending to overseas company
For instance, A US company is intending to open a
new branch in Australia, it needs 3 million AUD to
complete this plan. If the exchange rate is 0.6
AUD/USD, Australia can lend 5 million AUD at 7%
and make a swap contract so as to exchange the
AUD into US dollars (Amiti, 2016).

Borrowing from overseas
company
For instance, If an Australian company borrows an
amount of 5 million from US at 7% interest rate, in
next 6 months they can swap their payments by
exchanging an amount of 175000$ (5 million X 7%
x 0.5).

Journal entries
Initial recognition
Computer a/c Dr 50AUD
To accounts payable 50 AUD
End of reporting period
Accounts payable a/c Dr 5AUD
To exchange gain 5AUD
Recognition of profit and loss
Forward contract a/c Dr 5AUD
To gain 5AUD

REFERENCES
Kenen, P.B., 2011. Currency internationalization: an overview. BIS Papers. 61, pp. 9-18.
Beer, C., Ongena, S. and Peter, M., 2010. Borrowing in foreign currency: Austrian
households as carry traders. journal of Banking & Finance. 34(9). pp. 2198-2211.
Chen, H. and Peng, W., 2010. The potential of the renminbi as an international currency.
Currency Internationalization: Global Experiences and Implications for the
Renminbi, pp. 115-138.
Online
Amiti, M., 2016. What impact do exchange rates have on domestic prices? [Online].
Available through: <https://www.weforum.org/agenda/2016/04/what-impact-do-
exchange-rates-have-on-domestic-prices>. [Accessed on 27th May 2017].

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