Exchange Differences and Rounding
When you enter transactions and exchange foreign currency, small differences in values often arise as a result of changing exchange rates and the method of rounding exchanged amounts.
Currency fluctuations
When you purchase or sell an item for which payment will be made in the future, the exchange rate is likely to change between the day you receive the goods and the day you pay the invoice. These changes are tracked in an account called Realized Exchange Gain/Loss and recorded as either income or a loss on your income statement.
Example
You purchase an item for 100 units of a foreign currency, which you have 90 days to pay. On the day you receive the item, 100 units of this foreign currency converts to 150 units of your home currency, so it would cost you 150 units of your home currency to purchase the item. When you pay for the item 90 days later, the exchange rate changes, so that 100 units of the foreign currency now converts to 145 units of your home currency. The new exchange rate reduces the actual cost of the item to only 145 and you "earned" 5 units of your home currency over that 90-day period, which must be accounted for as revenue.
If the exchange rate has changed when you enter a payment for an invoice, enter the new rate and complete the invoice as you normally would: Sage 50 Accounting will automatically assign the difference to the Realized Exchange Gain/Loss account.
Note: If you are paying, or receiving funds for, the invoice using a foreign currency bank account, the exchange gain/loss amount is used only for reporting your assets in the home currency — that is, the Realized Exchange Gain/Loss account is used as a guide only, because foreign exchange gains and losses can only be calculated when the currency is actually converted into the home currency.
Exchange rounding
Sage 50 Accounting also accounts for rounding that occurs when the exchange rate is applied to the foreign currency.
Example: If you purchase two items from the same vendor in a foreign currency, your invoice might appear as follows:
| Item | Account | Foreign Amount |
|---|---|---|
| 200: External Speakers | 1540 Hardware | $534.99 |
| 655: Dictation Software | 1560 Software | $35.00 |
| Total in foreign currency | $569.99 | |
| 1 United States Dollar equals 1.5997033 Canadian Dollar | ||
In order to include the invoice in your company records, it must be converted into the home currency. Sage 50 Accounting applies the exchange rate to each line of the invoice, including the total, and adds the following amounts to these accounts:
| Account | Foreign Amount | Debits (Home Currency) | Home Currency Credits |
|---|---|---|---|
| 1540 Hardware | $534.99 | 855.83 | - |
| 1560 Software | $35.00 | 55.99 | - |
| 2220 Accounts Payable | $569.99 | - | 911.81 |
| 911.82 | 911.81 | ||
| 1 United States Dollar equals 1.5997033 Canadian Dollar | |||
As you can see above, this process can introduce a rounding "error". To account for small differences caused by rounding, Sage 50 Accounting automatically increases or decreases the Currency and Exchange Rounding account accordingly:
| Account | Foreign Amount | Debits | Credits |
|---|---|---|---|
| 1540 Hardware | $534.99 | 855.83 | - |
| 1560 Software | $35.00 | 55.99 | - |
| 2220 Accounts Payable | $569.99 | - | 911.81 |
| 4480 Realized Exchange Gain/Loss | - | - | 0.01 |
| 911.82 | 911.82 | ||
| 1 United States Dollar equals 1.5997033 Canadian Dollar |
Note: If you pay or receive funds for the invoice using a foreign currency bank account, the exchange gain/loss amount is used only for reporting your assets in the home currency - that is, the Realized Exchange Gain/Loss account is used as a guide only, because foreign exchange gains and losses can only be calculated when the currency is actually converted into the home currency.