Foreign Exchange Transactions

[?] Subscribe To The Bookkeeping Blog

The Tea Break

The Receipts Organization

The Tax - Canada

The Tax - U.S.

The Bookkeeping

The Back Office

Foreign Exchange Transactions

by Terry
(Ontario, Canada)

Income lost to foreign exchange rate changes.

I have received a cheque for payment in US dollars.

The (exchange) rate has changed and I am losing money - how do I record this in Quickbooks® without multiple currencies version?

What type of account?

Thank you so much.

image of fancy scroll lines

Hi Terry,

I am going to assume you do not have a US dollar bank account ... only a Canadian (CAD) dollar account.

I would setup a QuickBooks® account type other income (on the income statement) so the effect of the currency exchange does not show up in your normal everyday net operating profit (loss) ... but below the line under Other Income and Expense*.

I would call this account Gain (Loss) on Foreign Exchange.

Then I would setup an Other Charge item (on the list menu under items) ... call it something like Foreign Exchange. Set the tax code to be blank and leave the amount at zero. This will allow you to manually enter the amount each time you have a foreign currency transaction.

Setup your accounts receivable in QuickBooks® in CAD. On the second line, use the Foreign Exchange item to record the exchange amount using the Bank of Canada exchange rate for the day if your transaction does not have an exchange rate attached to it. It is always a good idea to make a note in the memo field stating the conversion rate used.

The effect of this transaction should be:

Dr Accounts Receivable for $950
Cr Sales for the CAD amount of $1000
Dr Gain (Loss) on Foreign Exchange for the conversion amount of $50

When you receive your US payment, deposit it to the bank if it is not a direct deposit. This amount will likely be different than the amount you booked above. So let's say you received $940 CAD.

Intuit suggests that you go back and change your original invoice ... but I'm not a fan of this method (especially if you have closed the period) ... it's the accountant in me. I would prefer to do one of two choices.

You could create an adjusting invoice, in this case a credit memo, for the $10 difference. I would select the Foreign Exchange item to record the adjustment. Again, I would make a good note in the memo field.

The effect of this transaction should be:

Dr Gain (Loss) on Foreign Exchange for the conversion difference of $10
Cr Accounts Receivable for $10 which would make the total for this customer $940

Then use Receive Payment to apply the CAD amount received ... followed by Make Deposit selecting the payment you just entered.

Or you could choose to go to Receive Payment to apply the original amount of the receivable booked ... followed by Make Deposit selecting the payment you just entered. On the second line of the deposit window, book the conversion directly to the exchange account so that your deposit matches the bank's deposit amount.

Under this option, the effect of the bookkeeping entry should be:

Debit Cash in Bank for the CAD amount received $940

Credit Accounts Receivable for the original amount of the accounts receivable $950

Debit Gain (Loss) on Foreign Exchange for the difference $10

As you can see this is a lot of trouble. So in truth, if you are a small business with little to no debt and no outside investors ... and this transaction was NOT going to be outstanding at year-end, I would just book the original invoice in CAD without taking into account the exchange rate.

Then I would use the second option to record the exchange rate when you receive payment. It simplifies the transaction.

So following through with our example, I would book the following entry using the QuickBooks® invoice form:

Dr A/R $1000
Cr Sales $1000

Then when I received payment, I would receive the $1000 through 'Receive Payment" and book the exchange amount in the 'Make Deposit' window. The effect of the two transactions would be:

Dr Cash in Bank $940
Cr A/R $1000 (through Receive Payments/Undeposited Funds)
Dr Foreign Exchange account $60 (through Make Deposit)

I hope one of these options are suitable for your business circumstances.

*Note - Intuit suggests setting this up as an Expense type of account instead of an Other Income ... but this is not my preference. I like internal financial statements to useful to management and allow / assist them to make informed business decisions.

The great thing about my suggested approach is that a person reading the income statement will able to assess the risk of the foreign currency (which is out of your control) while still being able to assess operations excluding the effect/uncontrollable risk of the foreign currency.

To me, they are two separate issues and this method allows you to separate the issues.

To see how Intuit recommends recording the occasional foreign transaction when you don't have their multi currency version, go to their article title How can I handle the occasional transacton in a foreign currency?. You will find it at: support.intuit.ca/quickbooks/en-ca/iq/Multicurrency/Tips-on-tracking-transactions-in-different-currencies/INF15448.html . This article gets moved around and updated, so you may have to hunt for it.

**Note - To understand the tax treatment, please refer to CRA's bulletin IT-95R Foreign exchange gains and losses.

QuickBooks® is a registered trademark of Intuit, Inc.

Sep 28, 2010
Rating

Purchasing US Products
by: Anonymous

I have your site in my favourites and visit several times a week. Your explanations are the best I can find online.

I am a CAD user and sometimes purchase US products. I am using QuickBooks Pro 2010.

I am having problems with the multi-currency. To best explain my problem - I purchased Paretologic security at $39.90 US. The exchange rate for that day is 1.2217 so the CAD total was $48.75. I entered $39.90 US for the vendor but then my CAD total is showing as less than the $39.90. I can make another entry for gains and losses for the missing amount.

Is this the right way to input my info?

Thank You Ellie

Sep 28, 2010
Rating

Foreign Currency Gains and Losses
by: Bookkeeping Essentials

Hi Ellie,

A couple of things:

1. Set your Sales Tax Code to Z for zero rated for US vendors.

2. Enter your exchange rate in the box in the bottom left hand corner of the Enter Bill screen ... Exchange Rate 1 USD = 1.2217 CAD.

3. Book your expense / asset purchase at the CAD value which in your example would be $48.75.

4. Book the exchange difference of $39.90 - $48.75= -$8.85 to the account Exchange (Gains) Losses. The account type should be Other Income so it is excluded from your operating profit total.

If you follow these points, you should be able to book your purchase in one entry.

Let me know if it works for you.

Sep 29, 2010
Rating

Foreign Currency Snapshot
by: Bookkeeping-Essentials.com

Ellie,

Here is a snapshot of the Enter Bill screen. Sometimes a picture is worth a thousand words.

QuikBooks multicurrency version of Enter Bills screen shot

QuikBooks multicurrency version of Enter Bills screen shot

Oct 09, 2010
Rating

Your answer for foreign exchange worked!
by: Ellie

Your explanation to deal with my foreign exchange worked well...thank you.

I realized while fixing my entries that about 80% of my purchases are through PayPal and I am given the CAD total and the US total on my receipt.

Would it be simplier to record my bill as received from PayPal, enter my CAD total and memo to read US purchase and the Company I purchased from? But what about tax? No tax is mentioned on the receipt.

Thank you again for the great advice.

Oct 09, 2010
Rating

PayPal Accounts in QuickBooks
by: Bookkeeping Essentials

Ellie,

When dealing with PayPal, it may be easier to do your bookkeeping and reconciliations if you create two additional bank accounts.

One bank account should be PayPal Canada for the CAD transactions / transfers and the second bank account should be PayPal US for the US transactions/transfers.

You should be able to go into your PayPal account and print out a monthly statement to aid in reconciling the two accounts each month.

With regards sales tax on imports and exports. It is my understanding that sales and purchases to/from the U.S. are zero rated if certain supply criteria are met.

Once you have determined the sales tax status for your U.S. customers and/or vendors, set the default sales tax code at the customer / vendor level. This means if Paretologic security is zero rated for sales tax purposes, set the sales tax code in QuickBooks to Z.

You may want to call CRA to verify this for your situation.

Remember to take some time this Thanksgiving weekend to spend with friends and family! ;0)

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Apr 28, 2011
Rating

Please Help Me
by: Rm Nyx, Nigeria

I came across your web page today and I was amazed with the kind of effort you must have put in to achieve this marvelous work.

I am a student and I study accountancy. My interest in foreign exchange transactions drew my attention to your website.

I need a distinct experience (Editor: I think this means specific example) to enlighten me on the processes and how to take effective advantage of foreign exchange.

Please I need a reply.

Apr 28, 2011
Rating

I'll add it to my to do list
by: Lake

Hi Rm,

Everyday my "to do" list grows. I have a lot of things on the go right now. All I can do right now is promise I will add to it to my "to do" list of future articles.

Thank you for taking the time to post and make this request.