Understand foreign currency accounting

Applies to:     Office Accounting Professional

All foreign currency transactions are posted in foreign currency as well as in pounds sterling (GBP). This results in a number of advantages:

  • The Balance Sheet report and Profit and Loss report are always in pounds sterling (GBP).

  • You can report on your transactions both in foreign currency and in pounds sterling (GBP).

  • The amounts on the documents do not change over time, even if the exchange rate changes.

  • It enables you to determine what your actual realised currency gains and losses are.

Important: Office Accounting uses Pounds Sterling (GBP) as the base currency. You cannot change the base currency. You can use foreign currencies for supplier accounts, customer accounts and some bank accounts; however, most account types will only use the base currency.

The following figure shows a sample Invoice form.

sample invoice form

The following figure shows an audit trail for the sample invoice.

sample invoice audit trail

Notice the credits and debits in both foreign currency and pounds sterling (GBP).

Note: In the audit trail shown in the preceding figure, two of the lines are in Canadian dollars (CAD) rather than pounds sterling (GBP). The Stock Asset Account and Cost of Sales (Materials) are always posted in pounds sterling (GBP)—even on foreign currency purchase invoices and invoices. This means that your cost is always calculated in pounds sterling (GBP).

Realised currency gain or loss

Currency exchange rates change over time. You can gain or lose money when you pay or receive amounts in foreign currency at a different exchange rate than what the invoice or purchase invoice was issued at. However, there is no gain or loss for your customers or suppliers, because you deal in their currency.

The realised gain or loss is best explained with some examples:

  • You issue an invoice to a Canadian customer for CAD 1,000, where the exchange rate is 2.0. The value of the invoice is £500.00. When the customer pays you the CAD 1,000 a few weeks later, the exchange rate has changed to 1.98. The value of the payment is now £505.05, which increases the value of your assets with £5.05. You have thus had an exchange gain of £5.05 due to the change in the exchange rate.

  • You receive a purchase invoice for USD 262.50 when the exchange rate is 2.1. The cost of your purchase is £125.00. When you pay the purchase invoice, the exchange rate has changed to 2.0, which increases the cost of the purchase invoice to £131.25. Because your liabilities have increased with £6.25 at the time of the payment, you have an exchange loss of £6.25.

Microsoft Office Accounting 2008 automatically calculates and posts the realised gain or loss whenever a document is settled. The gain or loss is posted to the accounts specified for each currency.

If the sample invoice in the preceding example was paid when the exchange rate was 2.2, the audit trail for the payment would look as follows.

sample payment audit trail

The following applies to foreign currency accounting:

  • The payment has two transactions, the payment itself and the currency gain or loss.

  • The deposit account (current account in this example) is debited with the full amount that was received at the 2.2 exchange rate, £100.

  • The sales ledger is credited with the same amount.

  • If the balance of the sales ledger for the particular customer isn't adjusted for currency gain or loss, it would be zero in Canadian dollars (CAD), but negative in pounds sterling (GBP), because it was credited with a larger amount than what was debited on the invoice.

  • The second transaction fixes that by clearing the sales ledger and by posting the £1.20 loss to the exchange loss account set up for Canadian dollars (CAD).

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