Foreign currency accounting
Applies to : Office Accounting Express, Professional

All foreign currency transactions are posted in foreign currency as well as in Sterling. This yields a number of advantages:

1. The balance sheet and profit and loss statement will always be in Sterling.

2. You can report on your transactions both in foreign currency and in Sterling.

3. The amounts on the documents will not change over time, just because the exchange rate has changed.

4. It enables you to see what your actual realised currency gains and losses are.

Let us look at a sample invoice:

The audit trail for the sample invoice above looks as follows:

Notice the credits and debits in both foreign currency and Sterling.

Note:In the audit trail above two of the lines are in Canadian dollars rather than Sterling. Stock and Cost of sales (here the Purchases account) are always posted in Sterling – even on foreign currency purchase invoices and invoices. It basically means that your cost is always calculated in Sterling.

Realised Currency Gain or Loss

Currency exchange rates change over time and you can gain or lose money when you pay or receive amount 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 customer or supplier, 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 increase the cost of the purchase invoice to£131.25. Since your liabilities have increased with £6.25 at the time of the payment, you have had an exchange loss of £6.25.

Office Accounting 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 above was paid when the exchange rate was 2.2, the audit trail for the payment would look as follows:

This is how it works:

  • The payment has two transactions, the payment itself and the currency gain or loss.
  • The deposit account (here current account) 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 wasn’t adjusted for currency gain or loss, it would be zero in Canadian dollars, but negative in Sterling, since 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.