Forex Lots In the forex market, currencies trade in lots called micro, mini, and standard lots. A micro lot is 1, units of a given currency, a mini lot is 10,, and a standard lot is , When trading in the electronic forex market, trades take place in blocks of currency, and they can be traded in any volume desired, within the limits allowed by the individual trading account balance. For example, you can trade seven micro lots 7, or three mini lots 30, , or 75 standard lots 7,, How Large Is the Forex?
The forex market is unique for several reasons, the main one being its size. Trading volume is generally very large. This exceeds global equities stocks trading volumes by roughly 25 times. How to Trade in Forex The forex market is open 24 hours a day, five days a week, in major financial centers across the globe. This means that you can buy or sell currencies at virtually any hour.
In the past, forex trading was largely limited to governments, large companies, and hedge funds. Now, anyone can trade on forex. Many investment firms, banks, and retail brokers allow individuals to open accounts and trade currencies. When trading in the forex market, you're buying or selling the currency of a particular country, relative to another currency.
But there's no physical exchange of money from one party to another as at a foreign exchange kiosk. In the world of electronic markets, traders are usually taking a position in a specific currency with the hope that there will be some upward movement and strength in the currency they're buying or weakness if they're selling so that they can make a profit.
A currency is always traded relative to another currency. If you sell a currency, you are buying another, and if you buy a currency you are selling another. The profit is made on the difference between your transaction prices. Spot Transactions A spot market deal is for immediate delivery, which is defined as two business days for most currency pairs. The business day excludes Saturdays, Sundays, and legal holidays in either currency of the traded pair.
During the Christmas and Easter season, some spot trades can take as long as six days to settle. Funds are exchanged on the settlement date , not the transaction date. The U. The euro is the most actively traded counter currency , followed by the Japanese yen, British pound, and Swiss franc.
Market moves are driven by a combination of speculation , economic strength and growth, and interest rate differentials. Forex FX Rollover Retail traders don't typically want to take delivery of the currencies they buy. They are only interested in profiting on the difference between their transaction prices. Because of this, most retail brokers will automatically " roll over " their currency positions at 5 p.
EST each day. The broker basically resets the positions and provides either a credit or debit for the interest rate differential between the two currencies in the pairs being held. The trade carries on and the trader doesn't need to deliver or settle the transaction. When the trade is closed the trader realizes a profit or loss based on the original transaction price and the price at which the trade was closed.
The rollover credits or debits could either add to this gain or detract from it. Since the forex market is closed on Saturday and Sunday, the interest rate credit or debit from these days is applied on Wednesday. Therefore, holding a position at 5 p.
Forex Forward Transactions Any forex transaction that settles for a date later than spot is considered a forward. The price is calculated by adjusting the spot rate to account for the difference in interest rates between the two currencies. The amount of adjustment is called "forward points. They are not a forecast of how the spot market will trade at a date in the future.
A forward is a tailor-made contract. It can be for any amount of money and can settle on any date that's not a weekend or holiday. As in a spot transaction, funds are exchanged on the settlement date. Forex FX Futures A forex or currency futures contract is an agreement between two parties to deliver a set amount of currency at a set date, called the expiry, in the future.
Futures contracts are traded on an exchange for set values of currency and with set expiry dates. Unlike a forward, the terms of a futures contract are non-negotiable. A profit is made on the difference between the prices the contract was bought and sold at. Instead, speculators buy and sell the contracts prior to expiration, realizing their profits or losses on their transactions. How Forex Differs from Other Markets There are some major differences between the way the forex operates and other markets such as the U.
Fewer Rules This means investors aren't held to as strict standards or regulations as those in the stock, futures or options markets. Companies use remeasurement when translating the value of revenues and assets from a foreign subsidiary that is denominated in another currency.
Remeasurement is also important because it can help companies revalue fixed assets physical, long-term assets as well as intangible assets, such as goodwill. Types of Remeasurement Remeasurement Due to Foreign Currency Translation Remeasurement is common for companies that do business in another country, where the local currency may be different from the company's reporting currency. Any gains or losses are reported in the company's income statement. Remeasurement may also be used when there is hyperinflation or large and frequent swings in the currency exchange rate.
Hyperinflation is when a country is experiencing rapid and excessive increases in the prices of goods. Remeasurement, in this context, is also known as the temporal method , which uses historical exchange rates based on when the assets were acquired. Foreign currency remeasurement could come into play for a U. Although the company might maintain some bank accounts and other assets denominated in euros, they would have to be remeasured into the functional currency for the parent company's financial statements.
Remeasurement vs. Translation Remeasurement converts financial results into a company's reporting currency, providing information about how future cash flows might change due to changes in exchange rates. Translation expresses the financial results of a separate entity, whose functional currency is different from that of the parent company. Remeasurement results are reported under net income, while translation results are reported under equity. Gains or losses from remeasurement are generally reported under net income, while foreign currency translation is recorded in "other comprehensive income.
These gains and losses are instead reported separately, below retained earnings , in the equity section of the balance sheet. Remeasurement Due to Impairment Remeasurement is employed during a situation when the value of a physical, long-term asset, such as land, has drastically decreased and cannot be recovered. A company holds the value of the land it owns on the balance sheet at historical cost —the price originally paid to acquire the land.
Generally accepted accounting principles GAAP require the use of historical cost when reporting fixed asset value because the amount is easily verifiable and typically conservative , as property tends to appreciate in value over time. Therefore, an appreciation in value may not be remeasured to a higher value on the balance sheet.
However, if the value of the land decreases significantly and permanently, a remeasurement may be appropriate. Remeasuring the asset allows the company to more accurately record the value of the impaired asset and may allow a deductible loss to be taken. In order to determine whether an impairment exists, a company needs to determine if the market value of an asset has dropped below its carrying value.
An impairment loss should only be recorded if the anticipated future cash flows are unrecoverable. Therefore, in the case of land impairment, a company would typically need to anticipate a sale in the near future in order to record a remeasurement to the lower value.
If its sale is not imminent, the value of the land could reasonably be expected to recover over time.
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Reporting revenue and expenses in different periods can make it difficult to pair sales and expenses and assets and net income can be overstated. But the allowance method is more commonly preferred and often used by larger companies and businesses frequently handling receivables.
The allowance method adheres to the GAAP. The direct write-off method can be a useful option for small businesses infrequently dealing with bad debt or if the uncollectibles are for a small amount. Why is the allowance method typically preferred over the direct write-off method? Big businesses and companies that regularly deal with lots of receivables tend to use the allowance method for recording bad debt.
As such, on the balance sheet, write-offs usually involve a debit to an expense account and a credit to the associated asset account. Each write-off scenario will differ, but usually, expenses will also be reported on the income statement, deducting from any revenues already reported. The two most common business accounting methods for write-offs include the direct write-off method and the allowance method. The entries will usually vary depending on each individual scenario.
Three of the most common scenarios for business write-offs include unpaid bank loans, unpaid receivables, and losses on stored inventory. Bank loans Financial institutions use write-off accounts when they have exhausted all methods of collection action. Loan loss reserves work as a projection for unpaid debts, while write-offs are a final action. Receivables A business may need to take a write-off after determining a customer is not going to pay their bill.
Generally, on the balance sheet, this will involve a debit to an unpaid receivables account as a liability and a credit to accounts receivable. Inventory There can be several reasons why a company may need to write off some of its inventory. Inventory can be lost, stolen, spoiled, or obsolete. On the balance sheet, writing off inventory generally involves an expense debit for the value of unusable inventory and a credit to inventory.
Tax Write-Offs The term write-off may also be used loosely to explain something that reduces taxable income. As such, deductions, credits, and expenses overall may be referred to as write-offs. Businesses and individuals have the opportunity to claim certain deductions that reduce their taxable income.
The Internal Revenue Service allows individuals to claim a standard deduction on their income tax returns. Individuals can also itemize deductions if they exceed the standard deduction level. Deductions reduce the adjusted gross income applied to a corresponding tax rate. Tax credits may also be referred to as a type of write-off.
Tax credits are applied to taxes owed, lowering the overall tax bill directly. Corporations and small businesses have a broad range of expenses that comprehensively reduce the profits required to be taxed.
An expense write-off will usually increase expenses on an income statement which leads to a lower profit and lower taxable income. Write-Downs Do not confuse a write-off with a write-down. In a write-down, an asset's value may be impaired, but it is not totally eliminated from one's accounting books. Write-Offs vs.
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Inventory There can be several reasons why a company may need to write off some of its inventory. Inventory can be lost, stolen, spoiled, or obsolete. On the balance sheet, writing off inventory generally involves an expense debit for the value of unusable inventory and a credit to inventory. Tax Write-Offs The term write-off may also be used loosely to explain something that reduces taxable income.
As such, deductions, credits, and expenses overall may be referred to as write-offs. Businesses and individuals have the opportunity to claim certain deductions that reduce their taxable income. The Internal Revenue Service allows individuals to claim a standard deduction on their income tax returns.
Individuals can also itemize deductions if they exceed the standard deduction level. Deductions reduce the adjusted gross income applied to a corresponding tax rate. Tax credits may also be referred to as a type of write-off.
Tax credits are applied to taxes owed, lowering the overall tax bill directly. Corporations and small businesses have a broad range of expenses that comprehensively reduce the profits required to be taxed. An expense write-off will usually increase expenses on an income statement which leads to a lower profit and lower taxable income.
Write-Downs Do not confuse a write-off with a write-down. In a write-down, an asset's value may be impaired, but it is not totally eliminated from one's accounting books. Write-Offs vs. Write Downs A write-off is an extreme version of a write-down , where the book value of an asset is reduced below its fair market value.
For example, damaged equipment may be written down to a lower value if it is still partially usable, and debt may be written down if the borrower is only able to repay a portion of the loan value. The difference between a write-off and a write-down is a matter of degree. Where a write-down is a partial reduction of an asset's book value, a write-off indicates that an asset is no longer expected to produce any income. This is usually the case if an asset is so impaired that it is no longer productive or useful to the owners.
What Is a Tax Write-Off? The Internal Revenue Service IRS allows individuals to claim a standard deduction on their income tax return and also itemize deductions if they exceed that level. Tax credits may also be referred to as a type of write-off because they are applied to taxes owed, lowering the overall tax bill directly. The IRS allows businesses to write off a broad range of expenses that comprehensively reduce taxable profits.
The GAAP requires the use of the allowance method. The direct write-off method waits until an amount is determined to be uncollectible before identifying it in the books as bad debt. Reporting revenue and expenses in different periods can make it difficult to pair sales and expenses and assets and net income can be overstated.
But the allowance method is more commonly preferred and often used by larger companies and businesses frequently handling receivables. The allowance method adheres to the GAAP. The direct write-off method can be a useful option for small businesses infrequently dealing with bad debt or if the uncollectibles are for a small amount.
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