Foreign Currency Exchange Rates, Essay Example

The below article review is analyzing the steps of accounting processes within currency exchange, in particular focusing on the challenges of accounting in international trade when exchange of currencies is involved. The article reviewed is: Helbing, Duss (2012) Exchange rate Differences and foreign currency translation.

In accounting, it is extremely important to record exchange rates correctly. According to Helbing and Duss (2012), the reasons to keep accounts in a foreign currency are:

• Competitiveness
• Market domination
• International compatibility

Converting amounts from one currency to another would be an advanced task for comparing prices of products or services in different countries and maintaining the competitiveness of the business by choosing cheaper suppliers. Purchasing Power Parity (PPP) is the method used in order to compare the average cost of services or goods between countries. (MaxiPedia, 2012) The calculation of PPP is very simple: the cost of goods in the first currency needs to be divided by the cost of goods in the second currency. However, this method only considers the average differences between currencies, and take into consideration the most likely exchange rate. When there is a fluctuation on the foreign exchange market and one of the currencies becomes significantly stronger than weaker than the average, deficits and surpluses would be created, and this would require the adjustment of accounts, as well as the business plans’. Depending on how long the deviance of the currency rate would last; important decisions need to be made to avoid loss and maintain the purchasing power parity and the competitiveness of the company on the global market. Payroll figures and costs of goods need to be converted to the currency using the PPP method, considering the revision of the currency pair exchange rates on a regular basis.(Helbing and Duss, 2012)

References

Helbing, Duss (2012) Exchange rate Differences and foreign currency translation. International Tax Review. February, 2012. Online.         <http://www.internationaltaxreview.com/Article/2981192/Exchange-rate-differences-and-foreign-currency-translation.html>

Purchasing Power Parity (PPP) Maxipedia.com. Online. < http://www.maxi-pedia.com/purchasing+power+parity> Retrieved: 10. 14. 2012.