Types of Currencies
1. Functional Currency - This is the main or primary currency in which the business uses to conduct its operations.
2. Transactional Currency - This is the currency that was used to make payment.
3. Reporting Currency -This is the currency the company uses to prepare its financial statements, it can also be called the accounting currency.
What is a foreign currency transaction? A transaction that uses a currency other than the functional currency of the company.
Gains/Loss from Foreign Exchange - A foreign transaction can arise to foreign exchange gains or losses due to foreign exchange rate fluctuations from transaction date, settlement date, and balance sheet date. A gain or loss can either be unrealized or realized.
Unrealized Gain or Loss - the fluctuation in exchange rate is recognized as of the balance sheet date or a reporting date when a payable in foreign currency remains unpaid or receivable in foreign currency remains uncollected.
Realized Gain or Loss - the fluctuation in exchange rate is recognized at the settlement date when a payable in foreign currency is paid or receivable in foreign currency is collected