Whenever you have a foreign bank account, changes in the currency exchange rates between that country and your home country can cause the value of your foreign currency to fluctuate. When your local currency weakens relative to the foreign currency, the value of your foreign account increases, creating a currency gain. When your local currency strengthens, your foreign account experiences a loss in real value. Your ABSS software can track these fluctuations.
Gains or losses in the value of a foreign account are considered unrealised while the money is still sitting in the foreign account. Conversely, when the money is withdrawn from the account, either by using it to pay for a purchase or by converting it to local currency, the gain or loss is considered realised.
Tracking realised currency gains and losses
Realised currency gains and losses on sales and purchases are tracked differently to realised currency gains and losses on deposits and withdrawals.
For realised gains or losses on sales and purchases, a posting is made automatically to the Currency Gain/Loss account.
For realised currency gains and losses on transfers-deposits and withdrawals-you need to make a general journal entry to the Currency Gain/Loss account.
When you activate the multiple-currency feature in your ABSS company file, a Currency Gain/Loss account is created automatically.
NOTE : Large foreign currency exposure If you have a large foreign currency exposure, you may require a more detailed analysis than posting to a single Currency Gain/Loss account provides. In this case, we recommend that you consult your accountant for further advice about managing your foreign currency exposure.
Sales and purchases
At the time a currency gain or loss is realised, that is, a payment is received or made, an automatic posting is made to the Currency Gain/Loss account and to the exchange account for the foreign currency.
The Currency Realised Gain/Loss report lists the currency gains and losses that have been posted automatically through sales and purchases during the month for foreign-currency transactions.
Example You sell goods for $300 at an exchange rate of $3.00 to the pound to a British customer. your ABSS software records the sale at $300 and records the £100 as owed by the British customer. The £100 is posted to British receivables account: $200 to the British receivables exchange account and $300 to the sales account.
The following month the British customer pays their account by depositing £100 into your British bank account, but the exchange rate has changed from $3.00 to $2.75 to the pound. The deposit is valued at $275.
You originally made a sale of £100 that at the time was worth $300. When you received payment, it was worth only $275. Therefore the $25 difference is a realised currency loss, and will be posted to the British receivables exchange account and to the Currency Gain/Loss account.
Transfers
Currency gains and losses that occur through the transfer of funds need to be recorded by a general journal entry.
At the end of the month, you can look at the value of your foreign accounts and use the Currency Calculator (from the Help menu at the top of the screen) to calculate their true values in local currency at that time.
You can then create a general journal entry where losses are posted as credits to the exchange account with a corresponding debit to your Currency Gain Loss account. Gains are posted as debits with a corresponding credit to your Currency Gain Loss account.
Example The original balance in your British bank account is zero and you transfer £100 at an exchange rate of $3.00 to the pound to it. The £100 is converted to S$300 and your ABSS software posts £100 to the British bank account and $200 to the British bank exchange account.
The following week you withdraw that £100 from the bank at an exchange rate of $2.75 to the pound. Your ABSS software values the withdrawal at $275. You put £100 into the account that at the time was worth $300. When you withdrew the £100 from the account, it was worth only $275. Therefore, the $25 difference is a realised currency loss.
If you now looked at your balance sheet, you would see a zero value for the British bank account, but $25 remaining in the British bank exchange account. You need to post the $25 in the exchange account to your Currency Gain Loss account.
Unrealised currency gains and losses
An unrealised gain or loss is a potential gain or loss at any point in time between the recorded sale or purchase and the receipt or issue of payment. No automatic postings are made to track unrealised gains or losses on foreign currency transactions.
Not all businesses need to track unrealised currency gains or losses. You should check with your accountant to determine whether your business needs to track them.
The Currency Unrealised Gain/Loss report lists the gain or loss made on each foreign currency. You can then use this information to make adjustment postings to each of your foreign currency accounts for your balance sheet and also to a profit and loss account.