Accounting in multiple currencies

[mcgrubso]

Sorry for the cross-post (I posted this in the General Business forum and was advised to post it in this one instead).

We've just opened a euro bank account and, having only had to do accounting in pounds up until now, I'm a little unsure about how I should be managing our books. I generally consolidate all the transactions from our different accounts once a month, but want to keep things as simple as possible now that we have an account in a different currency.

A friend told me the other day that the government publishes an official monthly exchange rate (which I have now found on the HMRC site) and that it's as simple as converting all of the monthly euro transactions to their sterling value based on this official rate, and keeping all books in sterling. Is that the case?

Presumably the books will eventually get a little bit unbalanced as the actual exchange rates when we transfer funds between accounts will be slightly different to the "official" rates. Should that be taken care of by adding an adjustment value to the euro account each month based on the actual closing balance of that account?

Any advice on this welcomed.

Thanks

 

[Scalloway]

You should write off differences arising from exchange rates in your P&L account to keep the books in balance.

 

[MrSpreadsheet]

Hi,
For profit and loss purposes the accepted practice would be to convert your foreign currency transactions using the exchange rate on the transaction date. If you make any gains (or losses) these should be reflected in your profit and loss.
If you hold foreign bank balances at the year end, then the accepted practice is to convert these into sterling at the rate prevailing on your Balance Sheet date.
I hope this helps.

 

[mcgrubso]

Thanks for your replies.

MrSpreasheet - are you saying I will need the exchange rate on the date of each transaction, and that I can't use the monthly official rates found on HMRC for all transactions in that month?

 

[David Griffiths]

The easiest solution is to use an accounting package that deals with multi-currency transactions. You then enter transactions in the native currency and the better programs convert income and expenses at the current rate. For some systems you have to update the rates manually, but at least some of the cloud based systems are able to update the rates on a regular basis. They will automatically work out exchange gains and losses.

In Xero, for example, you can choose your "base currency" in which all reports will be created (usually GBP) and then add other currencies and record invoices received and paid (e.g EUR and USD). You can tell the system which currency to use for each bank account.

If you add an invoice for EUR150, that will show as that amount in lists of accounts payable, but if the base currency is GBP then it's converted at the rate in force when you post it. Any movement in rate is reflected at the time that you pay the bill.

Frankly the amount of work involved in doing it all manually horrifies me!

 

[MrSpreadsheet]

Hi mcgrubso,
This is the theory, but, not necessarily the practice. It would not be unreasonable to convert all of your monthly transactions at a Standard Rate (such as the HMRC rate). When you eventually receive/pay for your currency transactions you will always get an exchange difference, which should be accounted for through the Profit and Loss.
If you have HIGH VALUE currency transactions (and you apply a Standard Rate), then you will need to be aware that your Profit figures will always be distorted by unrealised currency gains/losses.
I hope this helps.

 

[weebly_one]

Sage 50 also allows for multi currency in their Accounts Professional product which allows you to keep a foreign currency account, and manage certain customers and suppliers so their invoices and payments can be in the alternate currency to minimise problems with currency conversion.

You can product invoices and statements in the currency too if required.