When a foreign currency transaction is recorded on a particular date, it needs to be converted into Canadian dollars using the spot rate. For example, if you are entering a purchase order for $1,000 US dollars and the current spot rate of conversion is 1.35, the recorded transaction should be entered as $1,350 Canadian dollars.

At the Balance Sheet date, the account balances should be converted to Canadian dollars after adjusting for the current exchange rate. For example, if your year-end date is September 30th, all account balances such as US bank account and Accounts Receivable in US dollars need to be converted at the September 30th exchange rate. The foreign exchange difference between the rate you acquired those US dollars or originally recorded the receivable in US dollars and the year-end rate should be adjusted to the Income Statement to an account called “Unrealized Gain or Loss on Foreign Exchange”. As the foreign exchange of the account balance will fluctuate after the year-end, it is considered unrealized. As a result, an adjustment may be required on Schedule 1 of the corporate tax return for gain or loss on foreign exchange that should not be taxable.

During the year, there may be foreign exchange differences that occur on actual purchases and revenue or transactions that have been completed. These adjustments can be recorded to an account called “Realized Gain or Loss on Foreign Exchange” or you can adjust the individual transaction accounts which may be more difficult and time-consuming to do. Please note that accounting software varies in how they deal with recording foreign exchange on these realized transactions.