What is the first step in the recording process for operating transactions in foreign currency?

The initial step in recording operating transactions conducted in foreign currency is to record the original transaction at the exchange rate in effect on the transaction date. This creates a baseline measurement that reflects the value of the foreign currency in the reporting currency at the time the transaction occurs.

When an entity engages in a transaction that involves a foreign currency, it must convert that currency into its functional currency. The relevant exchange rate at the time of the transaction is used for this initial recording, ensuring that the records accurately reflect the financial effect of the transaction as of that date. This information is critical, as it establishes the initial amount on the financial statements and is the basis for subsequent accounting related to the transaction, such as revaluations and the recognition of any foreign exchange gains or losses that might occur later due to fluctuations in exchange rates.

Subsequent steps involving recalculating using the current exchange rate or computing gains and losses are contingent upon this initial recording, as they address the potential future effects on the financial statements resulting from changes in exchange rates over time.