3. Accounts payable denominated in foreign currencies

Accounting for a goods purchase denominated in a foreign currency is similar to accounting for a sale described above. Let’s continue our example by describing how the parts manufacturer would account for a purchase of steel from Canada. On December 1, 201X, the manufacturer orders $100,000 (U.S. dollars) of metal when one Canadian dollar (CAD) is worth $0.95. The price of the order in CAD is therefore 105,263 (i.e., $100,000 ÷ 0.95, rounded). The manufacturer pays for the order on December 20, when one Canadian dollar is worth $0.98.  Recall that the manufacturer records all transactions on its books in U.S. dollars.

(*) $103,158 = CAD 105,263 x $0.98, rounded

If instead the Canadian dollar is worth $0.93 on December 20, the company would have to pay less than $100,000 (U.S. dollars) to satisfy the liability, resulting in a gain.

Just as before, let’s extend the example by assuming that the Canadian supplier does not require payment until January 31, when a Canadian dollar is worth $0.99. The rate is still $0.98 on December 31.

(*) $3,158 = CAD 105,263 x $0.03, rounded, where $0.03 = $0.98 - $0.95

(**) $103,158 = CAD 105,263 x $0.98, rounded, or $100,000 + $3,158

(***) $104,210 = CAD 105,263 x $0.99, rounded

You’ll notice that, for both receivable and payable situations, we used the gain/loss account to balance the difference between the receivable or payable carrying amount and the cash (in U.S. dollars) actually received or paid.

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