Exchange rates and accounting issues

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

For example, on January 1st

  • 1 Euro (EUR) was equal to 1.32030 US Dollar (USD)
  • 1 US Dollar was equal to 0.7580 Euro
  • 1 EUR was equal to 1.60970 Swiss Franc (CHF)
  • 1 EUR was equal to 157.2030 Japanese Yen (JPY)

Multi-currency Accounting One talks about multi-currency accounting or multi-value accounting when accounts in different currencies are kept. It is necessary to have multi-currency accounting when a company has bank, cash, and debtors’ accounts in more than one currency. Even if just one account is in a foreign currency it is necessary to administer a multi-currency accounting.

Basic Currency

The amounts referring to different currencies cannot be totaled directly. It is necessary to have a basic currency to refer to and to use for the totals. The main 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 chosen and some operations have been executed, the basic currency can no longer be changed. To change the basic currency, the accounting must be closed and another opened with a different basic currency. The basic currency is also used to establish the Balance Sheet and to calculate the profit or loss of theoperation.

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. In 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 Euros and there are transactions in US Dollars, there needs to be an exchange value in Euros for every transaction in US Dollars. All the Euro amounts will be totaled to verify that the accounting balances.

Account currency

Each account has its own currency symbol which indicates in which currency the account will be administered. 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 entries in this currency will be permitted on this account. If the account is in Euro, then there can only be Euro entries on this account; if the account is in USD, then there can only be entries in the specified USD currency on this account. When you have to administer entries in YEN, then you have to have an account whose symbol is the YEN.

Account Balance in basic curency

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 be, beyond the amounts in USD, also its value in EUR. The EUR balance will be given 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 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 to 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:

 

Moneta base EUR

Moneta 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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