There are four concepts in foreign currency transactions. They are conversion, revaluation, translation and remeasurement.
Conversion takes place at the time of the transaction entry. Conversion converts the foreign currency value to the base currency at the days exchange rate. For example, if you have a payable liability of 100 USD and the exchange rate is 1 USD is 40 INR, the foreign currency payable is converted to the INR value of 4000.
This happens at the end of the period. The foreign currency account balances are revalued based on the period end exchange rate. Normally the impact goes into 'unrealized gains / losses' account. For example, if the exchange rate is 45 at the end of the period, the foreign currency payable is revalued to 4500 INR and the 'Unrealized Loss' in this case is Rs. 500. The accounting entry in the above case is:
Unrealized Loss Dr. 500
Liability Cr. 500
The above entry is either reversed at the beginning of the next period or carried forward. The actual realized gain / loss is booked at the time of closing the above transaction, by payment against the invoice in the above example.
Translation is used when the organization reports in a foreign currency which is different from its base currency. This process happens at the period end. In this case, the base currency trial balance is translated to the foreign currency trial balance. You can use different exchange rates to translate different account types. For example, you could use historical rates to translate owners equity and fixed assets, the period end rates to translate current assets and liabilities and period average rates to translate income statement accounts.
This happens in situations where your base currency is an inflationary currency. In this case the parent will want to keep a close track of the transactions by remeasuring each and every transaction in the currency of parent company. For example if your base currency is Argentine Peso and the parent currency is USD, each and every transaction in Argentine Peso will be remeasured in USD in the day's exchange rate. This ensures a tight control by parent on the subsidiary's operations and provides the parent with a real time report of the subsidiary's financial performance. This helps effective intervention by the parent in case subsidiary's performance significantly deteriorates due to domestic inflation.