How do you handle foreign currency transactions in QuickBooks?

The correct approach to handle foreign currency transactions in QuickBooks is by enabling the multi-currency feature in preferences. This feature allows QuickBooks to support transactions in multiple currencies, making it essential for organizations that deal with international clients or vendors.

When the multi-currency feature is activated, QuickBooks automatically handles the conversion of foreign currency transactions into the base currency based on the current exchange rate. This means that users can enter transactions in different currencies, and QuickBooks will facilitate accurate conversions without the need for manual calculations. Users can also manage different exchange rates for various transactions over time, ensuring accuracy and compliance with financial reporting requirements.

Additionally, enabling the multi-currency feature allows users to generate reports that include foreign currency balances and transactions, helping them to analyze their financial performance in a comprehensive manner. This functionality enhances efficiency and reduces the chances of errors that could occur by manually calculating and converting currencies.

In contrast, manually converting all transactions into the base currency does not provide the ease and accuracy that the multi-currency feature offers. Setting a fixed exchange rate for all transactions would not reflect the reality of fluctuating markets, and creating separate accounts for each currency adds unnecessary complexity to the accounting process.