Currency is the generally accepted form of money that is issued by a government and circulated within an economy. Currency is used as a medium of exchange for goods and services. Every nation has its own currency and global trade results in the exchange of currencies of different countries. Currency is the basis for trade and when the trade involves two different countries, generally two different currencies come into play. To obtain another country’s currency, it is necessary to buy it using the appropriate exchange rate, and the price of a currency compared to another is called the exchange rate.
For companies or accounting users managing multiple currencies, the interplay of foreign exchange rates and conversions can make the maintenance of the books a complicated task. Translation of statements may result in translation differences, which are accounted for as a cumulative translation adjustment. Businesses using the accrual method of accounting may recognize revenue or expense in one period and receive or pay it in another. In the intervening period, the exchange rate may have changed. When an accrued item is settled, the difference due to exchange rate movement in the amount accrued and the amount settled is treated as foreign exchange gain or loss.