How to handle foreign currency in your accounts

2 min read

Record in £Base currency

Gains/losseson movement

Hedgethe risk

Step 1: Convert to your base currency

UK company accounts are prepared in sterling. Every foreign-currency transaction is translated into pounds at the appropriate exchange rate — usually the rate on the transaction date — so all your figures are in one comparable currency.

Step 2: Handle rate movements

Between invoicing and payment, rates move. The difference between the rate when you booked a sale and the rate when you were paid is a foreign-exchange gain or loss, recognised in your profit and loss. It can flatter or dent profit without any change in trading.

Step 3: Translate year-end balances

Foreign-currency assets and liabilities still on the books at year end are retranslated at the closing rate, creating further gains or losses. This keeps the balance sheet realistic but adds volatility you should understand when reading results.

Step 4: Manage the risk

Currency swings are a real business risk for importers and exporters. Tools like forward contracts fix a rate in advance, and pricing in your own currency shifts the risk to the customer. Decide deliberately who carries the exchange risk.

Step 5: Fund the working-capital gap

Cross-border trade often means paying suppliers before customers pay you, with currency risk on top. Trade and working-capital finance bridge the gap.

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See VAT on imports.

Frequently asked questions

How do I record foreign-currency transactions?

Translate them into sterling at the appropriate exchange rate — usually the transaction-date rate — because UK company accounts are prepared in pounds. All figures must be in one base currency to be comparable.

What is a foreign-exchange gain or loss?

The profit or loss from exchange-rate movements between when a transaction is booked and when it settles, or when year-end balances are retranslated. It is recognised in the profit and loss and can move results without any change in trading.

How can I manage currency risk?

Fix rates in advance with tools like forward contracts, or price in your own currency to shift the risk to the customer. Decide deliberately who carries the exchange risk, especially as an importer or exporter.