How do I record income if I’m paid in foreign currency?

Why recording foreign-currency income needs a slightly different approach

If you earn money in a currency other than the one you normally keep your books in—maybe you invoice a US client in dollars, get paid in euros from a marketplace, or receive royalties in yen—you still need a clean, consistent way to record that income. The key challenge is that foreign-currency payments have two moving parts: the amount in the foreign currency (the “transaction currency”) and the value of that amount in your “home” or “functional” currency (the currency you use for accounting and tax reporting).

That second part matters because exchange rates change every day, sometimes every minute. Two identical invoices in USD can translate into different GBP totals depending on when you issue the invoice, when you receive payment, and when you convert the money. If you don’t track those differences properly, your income can look too high or too low, and you can miss (or accidentally invent) gains and losses that should be recorded separately.

This article gives you a practical, step-by-step framework to record foreign-currency income accurately, whether you’re a freelancer, a small business, or an online seller. You’ll learn how to choose an exchange rate method, how to handle bank fees and platform charges, how to record conversions and exchange differences, and how to keep your records tidy for reporting.

Start by defining your “home” currency for recordkeeping

Before you record anything, be clear about the currency your accounting records are kept in. For many people, this is simply the currency of the country where they are tax resident and where their bank accounts are. But in accounting terms, it’s often called your functional currency (the currency of the primary economic environment you operate in) and your presentation currency (the currency you present reports in). In practice, most small businesses use one currency for both.

Once your home currency is set, all your income must ultimately be recorded in that currency, even if the customer paid you in another one. The foreign-currency amount is still important for documentation, but your books need a single consistent measurement base.

If you operate in more than one country, have expenses mostly in one currency but customers in another, or keep significant balances in multiple currencies, you may want to be extra deliberate here. A clear policy reduces confusion later, especially at year-end when you reconcile balances.

The core principle: record transactions using an exchange rate policy

To record foreign-currency income consistently, you need an exchange rate policy—a rule that says which rate you will use and when. You don’t have to overcomplicate this, but you do need to be consistent and able to explain your method.

Most small businesses use one of these practical approaches:

1) Spot rate on the transaction date. Convert the foreign-currency amount to your home currency using the exchange rate on the date the income is earned (often the invoice date for accrual accounting or the payment date for cash accounting). This is the classic approach and is very defensible because it aligns with the timing of the transaction.

2) Rate provided by the payment processor or bank. If you receive funds through a platform (PayPal, Stripe, marketplaces) and it provides a clear FX rate used for settlement, you can record using that rate because it reflects what you actually received in home currency. This is particularly practical when you get paid and converted automatically in one step.

3) Monthly average rate (for high-volume, similar transactions). If you have many small transactions in the same foreign currency and converting each at a daily rate would be burdensome, some businesses use an average rate for the period. This should be applied carefully and consistently, and you should keep a record of how the average was calculated.

Whichever method you choose, apply it consistently across the year. If you change methods frequently, your records become harder to reconcile and your reporting less reliable.

Cash basis vs accrual basis: when is the income “recorded”?

How you record foreign-currency income depends partly on whether you keep books on a cash basis or an accrual basis. This determines which date is most relevant when choosing the exchange rate.

Cash basis (income recorded when you receive payment)

If you’re on cash basis accounting, you generally recognize income when the money hits your account (or when it’s made available to you). In that case, the payment date is usually the transaction date for conversion purposes. You would take the foreign-currency amount received and convert it using your exchange rate policy for that date.

This approach is straightforward for many freelancers and small businesses: you look at the payment receipt and translate it into your home currency using the chosen rate. If the payment platform already converts and deposits in your home currency, the amount deposited may be your home-currency income, with fees recorded separately.

Accrual basis (income recorded when earned, not when paid)

On accrual accounting, you record income when you earn it—often when you issue an invoice or deliver goods/services—regardless of when you’re paid. That means you may record the income at one exchange rate on the invoice date, and then later record what actually happens when the payment arrives. Any difference becomes a foreign exchange gain or loss rather than a change in “sales.”

For example, you invoice a client for $1,000. On the invoice date, $1,000 might equal £800. You record revenue of £800 and an accounts receivable of £800. When the client pays two weeks later, $1,000 might convert to £820 at that day’s rate. You still clear the receivable of £800, but you recognize a £20 foreign exchange gain separately.

This separation is important: revenue reflects the value of what you sold; exchange gains and losses reflect currency movement between invoice and payment.

Three common real-world scenarios and how to record them

Foreign-currency income usually arrives in one of three ways. Understanding which scenario you’re in will guide the accounting entries and help you avoid misclassifying exchange differences.

Scenario A: You invoice in foreign currency and get paid into a foreign-currency account

In this scenario, you might invoice in USD and receive USD into a USD bank account (or a multi-currency account that holds USD balances). You may convert later, or you may spend in USD.

Cash basis: On the payment date, record income in home currency using your chosen rate. Also record the USD amount in your bank ledger or tracking notes. If you later convert USD to home currency, record the conversion as a transfer between accounts plus any exchange gain/loss.

Accrual basis: Record the invoice at the invoice-date rate. When payment is received, clear the receivable at the original home-currency amount and record the difference as FX gain/loss. The USD bank balance then exists as a foreign-currency asset that can change in home-currency value over time.

Scenario B: You invoice in foreign currency and the payment processor converts instantly into your home currency

This is extremely common: you bill in USD, the client pays in USD, but the processor converts and deposits GBP (or whatever your home currency is) into your bank account. Here, the simplest approach is often to treat the deposited amount (net of fees) as what you received, but you should still split out fees and ensure income is recorded gross if your reporting requires it.

If the processor shows a clear breakdown—gross amount in foreign currency, FX rate, conversion amount in home currency, and fees—use those figures to build a clean record. Gross income should typically reflect the amount before fees, with fees recorded separately as expenses. The FX rate used by the processor is a real, transactional rate tied to the settlement and can be an appropriate basis for conversion.

Scenario C: You are paid in foreign currency for sales through a marketplace or platform with holds, refunds, and fees

Platforms can complicate things because they may show revenue, fees, and payouts in different ways. They may also group many transactions into a single payout, apply currency conversion at a batch level, and deduct refunds or chargebacks later.

The guiding idea is to align your accounting with the platform’s statements: record sales (gross), record platform fees, record refunds/chargebacks as negative revenue or separate contra-revenue accounts, and then record the net payout as a movement of cash. If the platform converts currency, use its documented conversion amounts and rates where available, or use your average/spot rate policy to translate underlying transactions consistently.

Step-by-step method: record foreign-currency income on cash basis

If you’re on cash basis, the workflow below will keep your records accurate without becoming overly technical.

1) Identify the foreign amount and the effective exchange rate for that date

Start with the payment receipt: how much foreign currency did you receive? Then determine the exchange rate used to translate it into your home currency according to your policy. If your bank or platform already converted the money, the effective rate can often be derived from the deposit amount versus the foreign amount, but it’s even better if the platform reports the rate directly.

2) Record income in your home currency

Create an income entry in your accounting system for the home-currency amount. In the memo or notes, store the foreign-currency amount and the rate used. This extra detail makes it far easier to reconcile later.

3) Record fees separately, not netted into income (where possible)

Many people accidentally record only what arrived in their bank account. That can understate revenue if fees are significant and you want a clear picture of gross sales. Even if you’re not required to show gross, it’s often useful for business analysis.

A clean approach is:

Income: Record the gross amount converted to home currency.

Fees: Record processor fees, platform fees, and bank charges as expenses (or merchant fees).

Net deposit: The bank deposit should equal gross income minus fees (and minus any withheld taxes or reserves, if applicable).

4) If you keep foreign balances, treat conversions as transfers

If the money lands in a USD account and you later convert USD to GBP, the conversion is not “income” again. It’s a transfer between accounts. The only new P&L item that may arise is an FX gain or loss caused by changes in value between the time you received the USD and the time you converted it.

Step-by-step method: record foreign-currency income on accrual basis

Accrual accounting requires two stages: the sale (invoice) and the settlement (payment). This is where exchange gains and losses show up most clearly.

1) Record the invoice in home currency using the invoice-date rate

When you issue the invoice, translate the foreign-currency invoice total into home currency at your chosen invoice-date rate. Record:

Debit: Accounts receivable (home currency)

Credit: Revenue (home currency)

In the invoice details, keep the foreign-currency amount and exchange rate used.

2) Receive payment and clear the receivable at the original home-currency amount

When the client pays, translate the foreign amount received into home currency at the payment-date rate (or use the actual home-currency deposit if it was converted on settlement). Compare that home-currency equivalent to the receivable balance.

If the home-currency value of the payment equals the receivable, there’s no FX difference. If it differs, the difference becomes:

FX gain if you receive more in home-currency terms than the receivable.

FX loss if you receive less in home-currency terms than the receivable.

3) Record FX gain/loss separately from revenue

This separation matters for understanding business performance. Your sales did not change; the currency value changed. Keeping FX differences in a dedicated account (often called “Foreign Exchange Gain/Loss”) makes reporting clearer and keeps revenue trends comparable month to month.

4) Revalue foreign-currency balances at period end (if applicable)

If you hold foreign currency at the end of a month or year (for example, you have $5,000 sitting in a USD account), that balance has a home-currency equivalent that changes with exchange rates. Many accounting frameworks require you to revalue monetary balances at the closing rate, recognizing unrealized FX gains/losses. Even if you’re not required to do formal revaluations, it can be helpful for accurate balance sheets.

For small operators, a practical compromise is to revalue at least at year-end if foreign balances are material. If balances are small, you may choose a simpler approach, but keep your method consistent.

Which exchange rate should you use, exactly?

This is the question people get stuck on: “What rate is the right one?” The best answer is: use the rate that matches your policy and your documentation. Here are the most defensible options, depending on your context.

Bank or processor settlement rate

If your processor converts the money and deposits home currency, the settlement rate is grounded in what actually happened. It also automatically reflects any spread embedded in the conversion. This can be very practical because it matches your bank deposit exactly.

Published spot rate for the transaction date

If you’re translating a foreign deposit into home currency but the platform doesn’t provide a settlement rate, using a published spot rate for that date is common. The key is consistency: pick a reliable source and stick to it, and document which one you use.

Average rate for the month (or week) for high volume

If you have dozens or hundreds of microtransactions (for example, app store sales in multiple countries), an average rate can reduce administrative effort. If you do this, keep a record of the calculation method and apply it consistently. If there’s a large swing in rates, daily spot rates may be more accurate, but average rates can be acceptable for practicality if differences aren’t material.

How to handle fees, commissions, and bank charges

Fees are where foreign-currency income records often get messy. The simplest principle is: record income based on what you earned (gross), record fees as expenses, and ensure your cash movements reconcile to the net payout. Here’s how to think about common fee types.

Payment processor fees

Processors typically charge a percentage plus a fixed fee, sometimes in the transaction currency, sometimes in your settlement currency. Record these as merchant fees or payment processing expenses. If the fee is deducted before you receive funds, you may record it as part of the same transaction split.

Platform commissions and marketplace fees

Marketplaces often treat fees as deductions from gross sales. For clearer financials, record the gross sales as revenue and the fees as an expense (or as cost of sales, depending on how you report). If the platform provides a statement that shows gross, fees, and net payout, mirror that structure in your books.

Foreign exchange fees and spread

Sometimes the “fee” isn’t listed as a separate line. Instead, the platform gives you a worse exchange rate than the mid-market rate, keeping the difference as their margin. That cost is real, but it’s embedded. If you use the settlement rate and record the home-currency deposit, you’ve already captured the effect; it just doesn’t show as a separate fee line. If you need to track FX costs explicitly, you can compare the settlement rate to a reference rate and estimate the spread, but that can be more effort than it’s worth for many small businesses.

Bank incoming wire fees

Banks may charge fees for incoming international payments or intermediary bank charges may reduce the amount received. Record these fees as bank charges. The income is still the amount you earned; the fee is the cost of receiving it.

Refunds, chargebacks, and negative payouts in foreign currency

Refunds and chargebacks are common in cross-border sales. The accounting challenge is that the refund may occur at a different exchange rate than the original sale, and platforms may deduct it from a later payout.

A practical approach is:

On cash basis: Record the refund when it occurs (or when deducted), translated into home currency using your policy for that date. Treat it as negative income or as a refunds/returns account. Any difference from the original home-currency amount is effectively an FX difference, but on cash basis it often gets absorbed into the timing differences in recorded net income unless you track FX separately.

On accrual basis: Record a credit note (or sales return) in home currency, usually at the rate used for the original invoice if it directly reverses that sale. Then record the cash movement when the refund is paid or deducted. Any exchange difference between the receivable/payable and settlement becomes FX gain/loss.

The goal is to keep a clear link between original sale, refund event, and cash movement, so your revenue reporting remains accurate.

Practical bookkeeping templates you can use

Even if you use accounting software, it helps to think in templates. Below are simple structures that map to common situations. These are conceptual rather than software-specific, but you can adapt them to your chart of accounts.

Template 1: Cash basis, foreign payment converted instantly and deposited net of fees

Example: Client pays $1,000. Processor converts and deposits £790 after fees. Processor fee is £30. Total gross in home currency is £820.

Record:

Revenue: £820

Merchant fees expense: £30

Bank deposit (cash): £790

This way, your bank reconciliation matches the deposit and your profit shows the fee separately.

Template 2: Accrual basis, invoice in USD, paid later, money hits a USD account

Invoice date: $1,000 at 0.80 = £800

Payment date: $1,000 at 0.82 = £820

Record invoice:

Accounts receivable: £800

Revenue: £800

Record payment:

USD bank (home-currency equivalent on books): £820

Accounts receivable: £800

FX gain: £20

Template 3: Cash basis, paid into foreign-currency account, converted later

Payment received: $1,000 at 0.80 = £800 (record income)

Later conversion: You convert $1,000 when the rate is 0.82 and receive £820.

Record payment received:

Revenue: £800

USD bank: £800

Record conversion:

GBP bank: £820

USD bank: £800

FX gain: £20

If conversion fees apply, record them as bank/FX charges and ensure the net deposit matches.

How to keep clean supporting documentation

The biggest risk in foreign-currency bookkeeping isn’t usually the math; it’s missing documentation and inconsistent decisions. The fix is to keep a small set of data points for every foreign-currency income event.

For each payment or invoice, keep:

1) Date of the transaction (invoice date and/or payment date)

2) Foreign-currency amount

3) Exchange rate used and its source (bank rate, processor rate, published rate, average rate method)

4) Home-currency equivalent recorded in your books

5) Fees deducted and how they were recorded

6) Reference number (invoice number, transaction ID, payout ID)

This can live in your accounting system notes, an attached receipt, or a simple spreadsheet that ties to your bank statements.

Choosing between gross and net income recording

People often ask: “Can I just record the net amount that hit my bank account?” Sometimes you can, but it depends on your reporting needs and how you want your financial statements to look.

Recording net (bank deposit only) is simple and may be acceptable for internal tracking if fees are small and you don’t need to analyze them. The downside is you’ll understate revenue and understate expenses, and you lose visibility into how much you’re paying in platform costs.

Recording gross (income before fees, fees as expenses) is more informative and often more aligned with how businesses evaluate performance. It makes it easier to compare sales across payment methods and identify whether fee structures are hurting margins.

If you’re unsure, gross recording is usually the better long-term habit because it gives you cleaner analytics and clearer audit trails.

Handling partial payments, deposits, and milestone billing in foreign currency

If a client pays in stages—like a 30% deposit and 70% on completion—each payment may occur at a different exchange rate. Your approach depends on accounting basis.

Cash basis: Record each payment when received, translated at that date’s rate. Your total home-currency income will be the sum of the translated installments.

Accrual basis: If you invoice the full amount up front, you record the receivable and revenue at the invoice-date rate. Each payment then clears part of the receivable at the invoice-rate home-currency amount, and any difference becomes FX gain/loss for that installment.

If you invoice separately for milestones, then each invoice is recorded at its own invoice-date rate, and the same clearing logic applies per invoice.

What about withholding taxes or platform-paid taxes in another country?

Some platforms or clients may withhold tax before paying you, especially for royalties, dividends, or certain digital marketplace programs. You might see a gross amount, a withheld tax amount, and a net payout. In that case, you generally want to record the gross income and record the withholding as a tax asset or expense depending on your circumstances and how it will be treated in your tax filings.

From a bookkeeping perspective, don’t let withheld amounts disappear into the net. If you record only the net payment, you may forget you’ve already had tax withheld and lose track of what you might be able to claim or credit later. Keep the documentation that shows the withheld amount, the basis for withholding, and the dates involved.

Year-end considerations: reconciling and revaluing foreign-currency balances

Year-end is when foreign-currency bookkeeping issues tend to surface. A few focused checks can save you a lot of headache.

1) Reconcile payouts and bank deposits

Make sure every platform payout, international transfer, and foreign receipt is matched to a bank deposit or a balance in a foreign-currency account. If you have “in transit” amounts (for example, funds sitting in a wallet or platform balance), record them as an asset so your books reflect reality.

2) Review FX gain/loss accounts for reasonableness

If you’re on accrual accounting and you record FX gains/losses, scan the totals. A small amount is normal. A very large amount relative to revenue might indicate you accidentally posted exchange differences into revenue or recorded conversions as income.

3) Revalue foreign currency balances if you hold them

If you have foreign-currency cash, receivables, or payables at year-end, consider whether you need to revalue them at the closing rate and record unrealized gains/losses. Even if you do this only at year-end, it improves balance sheet accuracy and keeps FX differences from piling up unnoticed.

Common mistakes and how to avoid them

Foreign-currency income is not inherently difficult, but it does have traps. Here are frequent mistakes and the habits that prevent them.

Mistake 1: Recording conversion proceeds as extra income

If you receive $1,000 and later convert it to £820, that £820 is not new revenue. The revenue happened when you earned or received the $1,000 (depending on your accounting basis). The conversion is a movement of cash between currencies. Any difference is an FX gain/loss, not revenue.

Mistake 2: Mixing exchange rate methods throughout the year

Switching between spot rates, processor rates, and random “best guess” rates makes your records inconsistent and hard to defend. Pick a method and stick to it. If you need to change, document the reason and apply it consistently going forward.

Mistake 3: Ignoring fees because “they’re already deducted”

Fees can be a big part of your cost structure, especially for cross-border payments. Recording gross income and fees separately provides better insights and keeps bank reconciliation cleaner.

Mistake 4: Not tracking refunds properly

Refunds that occur later can make a good month look artificially high if you don’t record them when they happen. Make sure refunds and chargebacks are captured with the correct dates and translated consistently.

Mistake 5: Letting foreign balances sit without reconciliation

If you keep money in foreign wallets or multi-currency accounts, reconcile them regularly. Small discrepancies can grow into confusing problems at year-end, especially when platforms batch transactions and apply adjustments later.

A simple checklist you can follow each time you’re paid in foreign currency

Use this quick routine to keep foreign-currency income tidy:

1) Identify the transaction type: invoice/payment, platform payout, refund, or conversion.

2) Record the foreign amount and date.

3) Apply your exchange rate policy to compute the home-currency amount.

4) Record income (gross if possible) and record fees separately.

5) Match the net amount to the bank deposit or foreign account balance.

6) If there’s a timing difference (invoice vs payment), record FX gain/loss rather than adjusting revenue.

7) Attach or store the supporting statement showing amounts and fees.

Examples to make it concrete

Sometimes seeing numbers helps. Here are a few examples you can adapt.

Example 1: Freelancer paid in EUR, cash basis, paid into home-currency bank via conversion

You complete a project and get paid €2,000. Your payment processor converts and deposits £1,690 into your bank after taking £40 in fees. The platform statement shows the converted gross as £1,730 and fees as £40.

You record:

Revenue: £1,730

Fees expense: £40

Bank deposit: £1,690

Your records reconcile to the bank and you can see the true cost of receiving the payment.

Example 2: Online seller with weekly USD payouts, using a monthly average rate

Your marketplace provides weekly payouts in USD to a USD wallet, and you have hundreds of small sales. You decide to translate sales using a monthly average USD-to-home-currency rate for your revenue entries, and you record payouts and fees based on the platform’s month-end report.

To keep it clean, you maintain:

Revenue account in home currency using the monthly average rate

Platform fees account in home currency (also using the monthly average rate or the platform’s reported converted totals)

USD wallet balance tracked with month-end revaluation or translated using a consistent method

The key is that everything ties back to platform reports and you apply the same conversion logic consistently.

Example 3: Accrual-based consultant invoices in USD and holds USD for expenses

You invoice $5,000 on March 1. Using your invoice-date rate, you record revenue of £4,000. The client pays on March 20, and at that date the home-currency equivalent is £4,150. You record an FX gain of £150 when clearing the receivable. You keep the $5,000 in your USD account and later spend $1,000 on a US service. That expense is recorded at the rate on the purchase date, and if you later convert remaining USD, further FX differences may arise.

This approach keeps revenue tied to the sale event and captures currency effects as their own line items.

When you might want professional input

Many people can handle foreign-currency income bookkeeping with the steps above, but there are situations where professional advice is worth considering:

1) You operate in multiple countries or have complex cross-border tax exposure.

2) You hold large foreign-currency balances or have large receivables/payables in foreign currency at year-end.

3) You have multiple entities or need consolidated reporting.

4) You’re dealing with withholding taxes, tax treaties, or reclaim mechanisms.

5) Your platform reports are inconsistent or you suspect discrepancies between transaction-level data and payouts.

Even a short consultation can help you set a robust exchange rate policy and chart of accounts structure that will save time and reduce errors later.

Putting it all together

Recording income paid in foreign currency is mainly about consistency and clarity. Decide your home currency, choose an exchange rate policy, and apply it the same way each time. On cash basis, you generally convert on the payment date; on accrual basis, you record revenue at the invoice date and treat later differences as FX gains or losses. Keep fees separate where possible, treat currency conversions as transfers (not income), and maintain documentation that links each foreign-currency transaction to a rate and a home-currency amount.

If you build these habits now, your books will be easier to reconcile, your financial reporting will make more sense, and you’ll be able to explain your numbers confidently—whether you’re reviewing performance, preparing for taxes, or simply trying to understand how currency movements affect your real income.