How do you manage foreign currency transactions?

(or small accounting homework)

With the arrival of free trade and globalization more generally, even small companies began to deal with foreign business partners.

Accountants therefore began to invent all kinds of methods to enter foreign currency transactions into computerized accounting systems that had not been designed for this purpose. These methods worked pretty well as long as we only had to recognize the US Dollar. But when it came to trading in other currencies, these simple management tips at first quickly became a nightmare to apply.

We suggest here an easy method to implement and follow and moreover correct accounting.

First some basic assumptions:

• Only balance sheet accounts should reflect changes in exchange rates over time.
• The income statements, for their part, must reflect the value of the transaction in Canadian Dollars at the rate in effect at the time of the transaction and not change.
• Exchange rates vary so often (but very little) we need a method applicable even if we do not change the calculations for rate every day!
• However, the method should be flexible enough to recognize that a sales transaction (for example) may be recorded at one rate but cashed at another a few weeks later.

If you agree, lets continue ...

Let us first add to our chart of accounts a so-called "Conversion" account for each balance sheet account that must support a foreign currency. Let this account in the Charter of Account immediately after the basic account. The purpose of this account is to bring in Canadian Dollar a basic account expressed in foreign currency (So much for the financial statements!).

Consider the example of a company that has a Canadian $ bank account, a USD Currency Bank account, and a USD Currency Customer account. We would end up with a partial charter as follows: