Recording foreign currency balance for P&L and balance sheet

Hi all,

My base currency is GBP

But I will be receiving USD into a USD account, and will not be converting it to GBP unless I feel it’s favorable to do so.

What are the correct journal entries for this, when it’s received and at year end?

Will there only be an exchange rate gain or loss at year end?

You don’t use journal to receive funds. Just set up a Cash Account based on USD. Set up a nominal exchange rate as from the first day of the financial year. If you don’t do any transfers then there won’t be any gain or loss.

When you do a transfer enter a new exchange for that date.

Thanks for your reply.

Just to confirm.

I would receive the money for goods, so DR USD account and CR income at the exchange rate for the year?

This would be done automatically in manager with the default exchange rate used.

Then in the future if I transfer using a different exchange rate, there is no gain/loss?

There is no gain/loss if the USD payment and GBP receipt is done as a paired transaction

Credit USD Bank US$1000 - Debit Funds Transfer US$1000 (rate .90 = GPB 900)
Debit UK Bank &900 - Credit Funds Transfer &900 (sorry keyboard doesn’t have pound symbol)

So if the transfer made the GPB balance grow, the assets would grow, but what is the other side of this?

I’m not sure how it balances?

@JPTrades, as I read this entire thread, I get the feeling that you may not be understanding @Brucanna correctly. Let me interject a few points, then back out of the conversation.

  1. In Manager, all transactions involving spending, receiving, or transferring funds into or out of bank or cash accounts must be entered under the Cash Accounts tab, not via journal entries.

  2. Every cash account can be denominated in its own currency. Movements in that account will be in the designated currency.

  3. No year-end entries in cash accounts are required for their own sake. The only reason you might be making them would be that you decided to move money then. But the same procedures would be followed no matter when you moved money.

  4. Foreign exchange gains and losses occur only when money is moved between currencies or into or out of the company, not at arbitrary dates, including year-end. Such gains and losses will only occur if exchange rates have changed between money coming in and going out.

  5. When receiving money in USD in a USD-denominated cash account for goods invoiced in USD, no foreign exchange is involved. As said above, exchange rates come into play only for money movement between currencies or into or out of the company.

  6. Foreign exchange gains (losses) is a P&L account that is activated automatically when multiple currencies are used. It is used to balance increases in assets or liabilities due to exchange rate differences. By design, it is listed on the P&L as a credit account, so it may sometimes move into negative territory.

  7. Manager does not revalue accounts based upon ongoing exchange rate fluctuations. A currency could crash with no affect on your accounts until you tried to spend/receive/transfer money in that currency.

Thanks for your help.

I guess at year end you can simply put in the latest exchange rate for up to date figures to appear on the statements. Correct?

Yes, but the USD balance would shrink, so the assets would shrink - everything remains neutral.
Try setting up a test company and trial a few transactions that mirror your business.

Not correct. See my points 3, 4, 5, and 7 above. Remember that, unless you move money, that USD-denominated account will not change value. If it was $1,000, it will remain $1,000 no matter what the dollar does against the pound. You gain or lose only when you convert.

I just tested it, when I go in to the settings - If I input a new exchange rate all the balances change.

Cash on the balance sheet changes, revenue changes and any existing gains or losses (on transfers) also change.

What dates are you using ?I if you edit the rate without changing the date then all transactions will change. But if you "create a new rate at a date after the transactions, then that rate will only apply after that date.

You don’t have one rate per currency - as rates change you will have a series of rates for that currency. If you like - each rate has a start date and will be applicable until the next rate start date.

I put in a new rate after all transactions and found that all balances changed.

I was just about to post a reply that said the same thing. But I just tried it out in my test company and discovered that is not true. My understanding was exactly like yours, @Brucanna, but I seem to have been misinformed. The balances in cash accounts and the gain/loss account change when a new rate is created, even though there have been no transactions.

I’m going to invite @lubos into this conversation to educate us all.

You can set exchange rates per customer/supplier invoice but these are not cash transactions.

Even if Manager assumes that each cash transaction is a currency transaction, you should be able to isolate (fix) transactions between rate dates to that periods rate.

What occurs over year end if you use an annual rate, do prior period cash transactions get altered ?

I agree, and thought that was how it worked.

No, apparently not, but the gains/losses change without entry of any transaction.

So I really don’t understand what is going on.

Please see below *

It would be good to avoid a gain if possible, as it would be taxed (which I think is unfair, as individuals are not taxed on forex gains - why should companies be?)

I think maybe this is the best solution, so there is no gain/loss, however is this accounting treatment allowed, or correct?

If this is done, then the original figure in the P&L will be different to the balance in £cash if the exchange rate has moved favourably.

According to my understanding transactions are recorded using the current exchange rate, and at year end the exchange rate for the day is used to determine acccurately balances for reporting purposes.

I’m just concerned that this system continually updates all figures any time an exchange rate is changed.

This would cause all kinds of problems, such as: creating gains/losses on balances received at different points in time with various exchange rates, which do not actually represent a real gain or loss (false gains and losses), or to continually recognise gains and losses after year end on balances which have already been subjected to a gain or loss for the previous period.

It seems a bit uncontrolled and a change should be made to this software I believe.

I think, if you amend the initial exchange rate to match the actual exchange rate used for an actual transfer then everything would be on the same playing field.

You have to remember that gain/loss is only an adjustment between two points in time.
If you did a 1000 invoice @ .90 then 900 (day 1)
If you did the 1000 transfer @ .95 then 950 (day 10)
Therefore gain/loss of 50

Which is no different to saying invoice @ .95 and transfer @ .95 (both on day 10)
The end result is the same it just the timing which is different.

@JPTrades - agreed and share your concerns. Without testing but I think the current exchange rate system seems to be based on sending an invoice and receiving a payment, without using an actual foreign bank account. The situations seems to not work correctly when an actual foreign bank account is in play - but only guessing. There have been some other topics concerning other aspects of exchange rates.