Every nation has its own currency and to obtain another currency it is necessary to buy it using the appropriate exchange rate. The price of a currency, as compared to another one is called the exchange rate. To exchange money means to convert the amounts of one currency into another. The exchange (exchange rate) varies constantly and indicates the rate of conversion.

For example, on January 1st

• 1 Euro (EUR) was equal to 1,22637 US Dollar (USD)
• 1 US Dollar was equal to 0,81529 Euro
• 1 EUR was equal to 1,08222 Swiss Franc (CHF)
• 1 EUR was equal to 126,52 Japanese Yen (JPY)

Basic Currency

Amounts referring to different currencies cannot be totaled directly. It is necessary to have a basic currency to refer to and to be used for the totals.
The central point of accounting is that the totals of the “Debit” balances must correspond to the totals of the “Credit” balances. To verify that the accounting is balanced, there must be a single currency with which to do the totals.
If there are different currencies, the basic currency must be indicated before anything else. Once the basic currency has been selected and some transactions have been executed, the basic currency can no longer be altered. To change the basic currency, the accounting must be closed and another one created with a different basic currency.
The basic currency is also used to establish the Balance Sheet and to calculate the profit or loss of the period.

Each amount has its equivalent in basic currency

To be able to add the totals and verify that the operations balance, it is necessary to have the equivalent in basic currency for every transaction. This way you can check that the total of the Debit entries is the same as the total of the Credit ones.
If the basic currency is EUR and there are transactions in USD, there needs to be an exchange value in Euros for every transaction in US Dollars. All the EUR amounts will be totaled to verify the accounting balances.

Account currency

Each account has its own currency symbol which indicates in which currency the account will be managed.
You must therefore indicate what the currency of the account will be. Each account will then have its own balance expressed in its own currency.
Only transactions in that currency will be permitted on this account. If the account is in EUR, then there can only be EUR entries on this account; if the account is in USD, then there can only be entries in USD currency on this account.
When you have to manage entries in YEN, then you have to have an account whose symbol is the YEN.

Account Balance in basic currency

For each account, alongside the balance in the account’s own currency, the balance in basic currency will also be kept, in order to calculate the balance sheet in basic currency.
The account card for the USD bank account has to correspond exactly to the bank statement as far as the USD amounts are concerned.
The value in basic currency will always be specified for each accounting entry. If the account is in USD, in the entries there will also be its value in EUR, beyond the amounts in USD. The EUR balance will be determined by the sum of all the entries expressed in EUR. The actual balance in basic currency will depend on the exchange rate factors used to calculate the exchange value of each single entry to EUR.
If on a given day you take the actual balance in USD and convert it to EUR at the prevailing daily exchange rate, you will get an exchange value that differs from the balance of the account in basic currency. This difference is due to the fact that the exchange rate used for entries on a daily basis is different from the actual daily exchange rate.
Thus there is a difference between the actual value at the daily exchange rate and the accounting balance in basic currency. This accounting difference is called the exchange rate difference.
The difference between the balance in basic currency and the calculated value has to be registered, when the accounting is closed, as an exchange rate profit or loss.  

 

Balances in another currency (currency2)

All the accounting reports will be calculated in basic currency. If you take the basic currency values and change them into another currency, you will get the balance in another currency. The program has a Currency2 column where all the values are automatically entered and presented in the currency specified as Currency2. The logic for the conversion of the amounts is the following:

• If Currency2 is the same as the account or operation currency, then the original value will be used.
• If the account is in USD and Currency2 is USD, the USD amount will be used.
• In all other cases the basic currency amount will be used and changed into Currency2.
• The daily exchange rate is used. Even for past entries, the exchange value in Currency2 will be expressed on the basis of the most recent exchange rate, and not on the historical one used on the day of the entry.

You need to pay attention to the fact that a balance converted to another currency will show small differences in the totals. Often the converted value of a total is not equal to the sum of split exchange values, as can be seen from the following example:

	Basic currency EUR	Currency 2 USD
Cash	1.08	1.42
Bank	1.08	1.42
Total Assets	2.16	2.84
Personal capital	2.16	2.85
Total Liabilities	2.16	2.85

In the basic currency, total assets are equal to total liabilities. It is permitted to present a Balance Sheet that contains differences only if they are understandable and if it is indicated that they were due to calculations from another currency.

Accounts table, Currency 2 view

 

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Below, we explain the theory of how exchange rates work.

Variability of exchange rates

The purchase/sale of currencies occurs in a free market. The price (exchange rate) is based on the law of supply and demand. The differences in the exchange value can be more or less important according to the fluctuations of the exchange rate.

The exchange rates in the following examples, are not the actual daily ones, but are fictitious to explain the problematic.

Date	Exchange rate EUR/USD	Equivalent in EUR of USD 1000.00	Equivalent value difference compared to 01-01
01-01	1.32030	1'320.03
31-03	1.33350	1'333.50	13.47
30-06	1.34750	1'347.50	27.47
30-09	1.42720	1'427.20	107.17

 

The exchange rate
The exchange rate refers to the basic currency. There are always two different exchange values between two currencies, according to the currency that is used as the basic currency.

For the USD and Euro currency, there are therefore two different exchange rates:

• If the basic currency of the exchange is EUR then the exchange rate is 1.32030
  1 Euro (EUR) corresponds to 1.32030 US Dollars (USD)
• If the basic currency of the exchange is USD then the exchange rate is 0.75800
  1 US Dollar corresponds to 0.75800 Euros

In the current document, the Euro will be regularly used as the basic currency, to which other currencies will be compared.

Inverse exchange rate
Having the exchange of EUR/USD at 1.32030, it is possible to find the exchange rate of USD/EUR by dividing 1 by the exchange rate.

Exchange rate	Inverse exchange rate 1/exchange rate	Inverse exchange rate rounded to 6 digits
EUR/USD 1.32030	0.75800	0.758000

 

The exchange values calculated with an inverse exchange can turn out to be different from the original one due to rounding.

Exchange rate	Inverse exchange rate	Exchange value 10000 x original exchange rate	Exchange value 10000 x inverse exchange rate	Difference
EUR/USD 1.32030	0.75800	13'203.00	13'192.61	10.39

Don't use inverse exchanges rates in order to avoid differences.
For the transition to the Euro, for example, the use of inverse exchange rates was prohibited.

Multiplier
There are currencies that have very large exchange rate values.

Always on January 1^st

• 1 US Dollar = 670,800 Turkish Lira
• 1 Turkish Lira (TRL) = 0.00000149 US Dollar (USD)

Instead of using that many zeros, it can be said that

• 1000 Turkish Lira (TRL) = 0.00149 US Dollar (USD)

In this case, the multiplier is 1000 instead of 1.

Preciseness 
As a rule, an exchange rate is specified with a preciseness of at least 6 figures after the decimal.
There are, however, cases where it is necessary be more precise.

• 1 Turkish Lira (TRL) = 0.00000149 US Dollar (USD)

When the preciseness is changed and the exchange is rounded in a different way, the amounts also change. The preciseness with which the exchange is specified is very important.

Minimum denomination
  Especially for paper money, minimum denominations are used. As a rule the lowest denomination for Swiss francs is five centimes (0.05). When an exchange occurs, for example EUR/CHF:

1 EUR = 1.60970 CHF

EUR	Exchange rate	Actual exchange value in CHF	Rounded to lowest CHF denomination	Difference	Effective exchange rate
10.00	1.60970	16.09	16.10	0.01	1.61

   

Calculation of exchange rates and values
When the Euro is the basic currency

The exchange factor for EUR/USD is 1.32030
1 Euro (EUR) is equal to 1.32030 US Dollars (USD).

Calculation of the exchange value:
Multiply the basic currency amount by the exchange factor:

EUR 100 x 1.32030 = USD 132.03

Calculate the basic currency amount:

Divide the destination currency by the exchange rate:

USD 132.03 / 1.32030 = EUR 100

Calculate the exchange factor:

Divide the basic currency amount by the destination currency amount:

EUR 100 / USD 132.03 = 0.7574   

Exchange rates for purchases and sales
Banks carry out the purchase and sale of currencies and include a transaction margin. They apply different exchange rates depending on whether a determined currency is being bought or sold.

Sale: the bank receives domestic money and provides (sells) foreign money.

Purchase: the bank receives (purchases) foreign money and provides domestic money.   

Currency exchange and banknotes exchange (premium)
Currency exchange: exchange for scriptural transactions (from one account to the other).
Banknote exchange: exchange for banknotes.
Premium: commission for converting a scriptural amount to cash.

To exchange currency, the banks maintain a lesser margin (the difference between purchase/sale) compared to exchanging banknotes. When a scriptural value is to be transformed (credit on the account) into cash currency, the bank applies a commission, called a premium.   

Differences when changing back to basic currency 
When an amount is exchanged into another currency, it is expected that the reverse exchange will result as identical to the original amount .

Basic amount	Exchange rate	Exchange value	Return
100.00	1.32030	132.03	100.00

However, you do not always come up with the same amount when converting currency back. Because of rounding errors, there may be cases where the same return value cannot be obtained.

Basic amount EUR	Exchange rate	Exchange value in USD	Return in EUR	Difference in EUR
328.67	1.32030	433.94	328.66
328.68	1.32030	433.95	328.67	0.01
328.69	1.32030	433.96	328.68	0.01

 

Differences of totals through splitting 
The total exchange value of the components of an amount does not always result in the same exchange value as the overall amount.
In this example, the amount of 2.16 EUR produces an exchange value in USD of 2.85. By splitting the amount and adding the two exchange values, 2.84 will result.

Amount in EUR	Exchange rate	Exchange value in USD
2.16	1.32030	2.85
1.08	1.32030	1.42
1.08	1.32030	1.42
Total 2.16		2.84
Difference		0.01

These mathematic differences cannot be eliminated if they are not recorded properly.

 

Exchange rates vary all the time and therefore the exchange value to basic currency also varies. Between one period and another, there will inevitably be exchange rate differences.

Exchange rate differences are not accounting errors but simple adjustments of the values made necessary in order to keep the accounting figures in line with fluctuations.

As you open the accounting, the figures in the balance column are equal to those present in the opening column. When there are entries, these will update the figures in the balance column.

The calculated balance column contains the exchange value of the basic currency for the account balance, at the daily exchange rate (of the exchange rate table). The difference between the balance in basic currency and the calculated balance is the exchange rate difference.

		Currency at opening		Exchange value at opening in EUR	Basic currency balance in EUR	Calculate balance at 30.03.200xx in EUR	Exchange rate difference
Exchange rate				1.32030	1.32030	1.30150
Cash	EUR	93.80		93.80	93.80	93.80
Bank	USD	100.00		75.74	75.74	76.83	1.09
Real estate	EUR	1'000.00		1'000.00	1'000.00	1'000.00
Total Assets				1'169.54	1'169.54	1'170.63
Loan	USD	-500.00		-378.70	-378.70	-384.17	-5.47
Personal capital	EUR	-790.84	790.84		-790.84	-790.84
Total Liabilities				-1'169.54	-1'169.54	-1'175.01
Loss						-4.38

On March 30th the EUR/USD exchange rate is different from the one at the beginning of the year. In the above example, there were no accounting entries during the three-month period. The situation, from an accounting point of view, has not changed since the beginning of the year. Despite this the total of the updated balance, using the rate at the end of March, is different when compared to the beginning of the year. The credit bank balance and the loan in USD have a different value in EUR. There are therefore consequences for the accounting even though there have been no entries.

In the above example, you will notice that the Euro is now worth less against the dollar compared to the beginning of the year. The dollar is therefore worth more against the Euro.

The exchange value of the balance on the account in USD is greater than it was at the beginning of the year. You have a greater value of the asset and therefore a profit on the exchange rate.

On the liability side there is a USD 500.00 loan. Now the exchange value in EUR is greater compared to the value input at the beginning of the year. The value of the loan has increased and brings about a loss due to the exchange rate difference.

In the following example we shall use the hypothesis that there has been the opposite development. We imagine that the Euro has increased in value and is therefore worth more against the USD. The exchange value in EUR of an amount in dollars is less than the one at the beginning of the year.

		Currency at opening	Exchange value at opening EUR	Calculate balance at 30.03.20XX Eur (Hypothetical)	Exchange rate difference
Exchange rate			1.32030	1.36150
Cash	EUR	93.80	93.80	93.80
Bank	USD	100.00	75.74	73.44	-2.30
Real estate	EUR	1'000.00	1'000.00	1'000.00
Total Assets			1’169.54	1'167.24
Loan	USD	-500.00	-378.70	-367.24	11.46
Personal capital	EUR	-790.84	-790.84	-790.84
Total Liabilities			-1’169.54	-1'158.08
Profit				9.16	9.16

As a consequence of an increase in the Euro/dollar exchange rate, you have a USD bank deposit with an exchange value in EUR which is less than at the beginning of the year. The total worth has diminished and there is therefore a loss.

The USD loan has a lower exchange value in EUR. A lesser liability is an advantage for the company and there is thus an exchange rate profit.

  

Exchange rate profit

 You have an exchange rate profit when:

• The exchange value of your assets increases (increase of the investments)
• The exchange value of the liabilities decreases (decrease of the loans).

  

Exchange rate losses

You have an exchange rate loss when:

• The exchange value of your assets decreases (decrease of the investments)
• The exchange value of the liabilities increases (increase of the loans).

Accounting features for exchange rate differences

 Exchange rates can evolve in different ways. Often they rise, only to fall again. The principle rule for accounting is that the figures provided on the Balance Sheet must be true ones. When you present your Balance Sheet, the exchange values of foreign currency accounts must be made at the exchange rate on the day of presentation.

The exchange rate difference is calculated as if you had to definitively convert the amount to basic currency. In reality there is no definitive conversion so you are only dealing with a correction to the accounting.

  

Closing exchange rate

 At the end of each year it is necessary to prepare the complete Balance Sheet. The exchange rates thus have to be updated with the closing exchange rates. It is also necessary to enter the exchange rate differences once and for all; if these are not entered, then there will be differences in the opening balances.

  

Entering exchange rate differences
 

		Currency balance	Account balance EUR	Calculate balance at 30.03.xx EUR (hypothetical)	Exchange rate difference
Exchange			1.32030	1.36150
Bank	USD	100.00	75.74	73.44	-2.30
Exchange rate difference	EUR		-2.30
Bank	USD	100.00	73.44	73.44	0.00

As can be seen from the above example, the bank balance is USD 100.00. For the accounting it has been valued at 75.74 EUR. Today’s actual value, though, is only EUR 73.44. There is a difference of EUR 2.30 EUR in basic currency. The entry must therefore decrease the EUR amount. You proceed with a transaction that debits the bank account and credits the exchange rate loss account by EUR 2.30.

As you can see, the actual bank account balance of USD 100.00 has not been altered. The entry only alters the basic currency balance.

When entering the exchange rate difference, you need to ascertain that the exchange value in basic currency corresponds to the actual exchange value, calculated at either the daily exchange rate or the closing one.

The figures in the account currency must not be altered. You must therefore proceed to make an entry that only alters the basic currency balance on the specific account.

You will have the exchange rate profit or loss account on the contra account.

 

   

Transactions valued at the purchase exchange rate

When the positions, valued with exchange rates at the time of purchase (historical) are increased or decreased, you will have to calculate the exchange rate of the exchange rate table, taking into account the development of the amounts of increase.

 

	USD amount	Exchange	EUR exchange value	Total USD	Total EUR	Historical Exchange
Acquisition of shares	100'000.00	0.9416	106'202.00	100'000.00	106'202.00	0.9416
Increase of shares	50'000.00	0.8792	56'870.00	150'000.00	163'072.00	0.919839

 Investments valued at the exchange rate of the time purchase

Certain investments (shares, real estate abroad) are valued using the exchange rate of the time of purchase (historical exchange) and not the current one. The exchange rate profit and loss is not accounted for until it is actually realized. You must therefore make certain these accounts do not get valued using the current exchange rate.
In order to input a fixed historical exchange rate, you need to create an additional currency on the Accounts table (e.g. USD1) with a fixed exchange rate. 
It is essential that in the Fixed column of the Exchange table, when viewed in Complete, for each currency with a fixed exchange rate, Yes must be inserted; otherwise, the currency and its related account are still revalued.

This currency will then only be used for this specific account ( ex: USD1) with a fixed rate. 

If you have to make a transfer from the USD account to the USD1 account, you proceed exactly as if you were working with two different currencies. For this reason you will have to use a two-row entry.

Opening with special exchange rates

By inputting the opening balances in the Opening column, foreign currency amounts will be converted to basic currency at the opening exchange rate.
If this system does not prove flexible enough (i.e. you need various special rates or there are rounding differences) the opening can be done manually by making normal entries, indicating the amounts and the exchange rates you want for each account. In this case, the "Opening” column of the Accounts table will be left blank.