Mastering Multiple Currency Accounting
As we transact globally, we need to be able to bank in and transact in a variety of currencies. This is an overview of how financial accounting systems work with multiple currencies enabled.
A base currency or functional currency is the default used by an accounting system within one company. Typically the base currency is the same as a country that the company is operating in. An American company would have US dollars as its base currency.
A company may need to transact in multiple currencies. These are referred to as foreign currencies or transactional currencies. The American company could also have Canadian and Euro set-up for transactions coming in from suppliers and clients in foreign countries. An example would be a sale to a client in France that wants to be invoiced in Euro.
The American company might also have bank accounts in Euro or Canadian dollars. The application needs to be set up so the system bank account has a currency that is identical to the physical bank. Then when banks are reconciled, the GL bank and the bank statement match.
Accounting information systems are smart enough to allow the bank accounts to transact in their foreign currencies but then to use the system exchange rates to show the correct balance sheet and income statement in US dollars.
Most accounting products support an easy feed or import of exchange rates directly into the foreign exchange table.
Foreign exchange gain or loss explained:
This is the amount that represents the change in currency between the time the sale was booked and the time the cash was received for the sale. If I sell a book for $10 Canadian at a time when the Canadian dollar is the same as the US dollar this would equal $10 US. If it takes two months for me to collect for the book and there has been a change in the exchange rate, then I have effectively lost or gained some extra money. The foreign exchange gain or loss is the booking of that profit or loss on the sale due to the extended collection time and the currency exchange rate change over that time. The same can hold true for purchase and payments.
Foreign currency revaluations explained:
The balance sheet at month-end needs to be trued up for the current exchange rate. Most financial systems will have wizard or features that easily revalue accounts. Accounts that need to be revalued are identified during the account set-up process.
With exchange rates on the move in 2015, use Accounting Systems with a high level of automation to handle foreign currency transactions.
All applications from Nolan Business Solutions support multiple currencies. www.nolanbusinesssolutions.com