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 once company. Typically the base currency is the same as the country that the company is operating in. An American company would have US dollars as its base currency.
A company may also 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 Euros.
The American company might also have bank accounts in Euro or Canadian dollars. The application needs to be set up so the system bank accounts have currencies that are identical to the physical banks. Then when banks are reconciled, the GL bank and the statement match.
Systems are smart enough to allow the bank accounts to transact in their 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. The foreign exchange gain or loss is the booking of that profit or loss on the sale due to extended collection time and the currency exchange rate 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, to find out more please visit www.nolanbusinesssolutions.com
Written by Kim Haythornthwaite, Nolan Business Solutions Inc.