Entering foreign currency transactions for the first time
Updating the exchange rate and entering subsequent foreign currency transactions
Re-translating foreign currency balances at year-end
Correcting foreign currency errors
The key accounting requirements for foreign currency (according to FRS 102) are:
a)Foreign currency transactions must be translated to the base currency at the spot exchange rate on the day of the transaction (or an average rate for the week or month if the exchange rate does not fluctuate significantly)*
b)Monetary balances (e.g. bank, customers, suppliers) in foreign currencies must be re-translated to the base currency at the spot exchange rate on the day of the financial year-end
*Note: If you enter transactions in foreign currency that are subject to VAT, you should use the exchange rates specified by HMRC. These can be found on HMRC's website.
Following the steps below, in the correct order will fulfill these requirements.
Entering foreign currency transactions for the first time
These steps must be carried out in the correct order (assume GBP is the base currency).
1. Set the initial exchange rate:
•Select Set up > Currencies, departments and lists > Currencies > New
•Enter the name of the foreign currency, and the exchange rate required
| E.g. if you are entering Euro transactions from January 2023 and decide to use an average rate for the month of, for example EUR 1.12 to 1 GBP, enter the name as Euro and the rate as 1.12. |
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•The currency is then displayed, click on No ledgers are currently analysed by the above list. Change..
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•Tick the ledgers you wish to apply foreign currency to e.g.
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2. Create foreign currency customers/suppliers (if you have any):
•Select Set up > Accounts > Customers/Suppliers > New and enter the details.
| The foreign currency is assigned when you first enter a transaction to the account, by selecting the currency from the Currency drop-down in the transaction entry screen. |
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| The currency drop-down in the transaction entry screen |
3. Create foreign currency bank accounts (if you have any):
•Select Set up > Accounts > Bank > New and enter the details.
| The foreign currency is assigned when you first enter a transaction to the account, by selecting the currency from the Currency drop-down in the transaction entry screen. |
4. Enter transactions in foreign currency:
•Enter transactions in the usual way (see Transaction entry methods) but select the foreign currency from the Currency drop-down in the transaction entry screen (Foreign currency transactions cannot be entered using the P+R transaction or the Universal Input Sheet).
| These transactions are translated to GBP at the rate set up in step 1. above. E.g. if a supplier invoice is entered at EUR 1,000.00 and the rate is set at EUR 1.12 to 1 GBP, this is translated to GBP as 1,000.00 / 1.12 = GBP 892.86. |
Updating the exchange rate and entering subsequent foreign currency transactions
Update the exchange rate as often as is needed to meet accounting requirement a). If you decide to set an average rate for the month, enter this rate with a date of the beginning of the month.
These steps must be carried out in the correct order (assume GBP is the base currency):
1. Update the exchange rate:
•Exchange rates are updated using the Revalue currencies function. Select Set up > Currencies, departments and lists > Revalue currencies. Select the currency, enter the date and the new rate.
| E.g. if you are entering Euro transactions from February 2023 and decide to set an average rate for the month of, for example EUR 1.13 to 1 GBP, enter the new rate at 1.13, dated 1 Feb 2023. |
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| Note: The Revalue currencies function not only updates the exchange rate but also re-translates existing foreign currency balances to GBP at the new rate. It does not re-translate the P&L or VAT elements of previous transactions (to comply with accounting requirement a) above). |
| E.g. if the supplier balance from above of EUR 1,000.00 (GBP 892.86) is still outstanding, it is re-translated to GBP at the new rate (i.e. 1,000.00 / 1.13 = GBP 884.96). |
| This creates an exchange difference on re-translation of GBP 7.90 (GBP 892.86 - GBP 884.96), which is automatically posted to the P&L account - Exchange differences and charges. This entry is part of the amount in the currency revaluation transaction (which has a CRV prefix). The revaluation transactions can be displayed by selecting Display > Currency revaluations. On currency revaluation page, there is also a revaluation report which shows the revaluation on each account. |
2. Enter transactions in foreign currency at the new rate:
•Enter transactions in the usual way (see Transaction entry methods) but select the foreign currency from the Currency drop-down in transaction entry screen (Foreign currency transactions cannot be entered using the P+R transaction or the Universal Input Sheet).
| These transactions are translated to GBP at the new rate. E.g. if a customer invoice is entered for EUR 2,000.00, this is translated to GBP as 2,000.00 / 1.13 = GBP 1769.91. |
Re-translating foreign currency balances at year-end
Assume GBP is the base currency.
1. Revalue the foreign currencies:
•Select Set up > Currencies, departments and lists > Revalue currencies. Select the currency, enter the year-end date and the rate.
| E.g. if your year-end is 31 December 2023 and the spot rate on that date is, for example EUR 1.17 to 1 GBP, enter the new rate of 1.17 with a date of 31 Dec 2023. |
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| This re-translates any foreign currency balances to GBP at the new rate. Exchange differences are created between foreign currency balances translated to GBP at the new rate, and the same balances translated to GBP at the old rate. The exchange differences are automatically recorded in the P&L account - Exchange differences and charges. This entry is part of the amount in the currency revaluation transaction (which has a CRV prefix). The revaluation transactions can be displayed by selecting Display > Currency revaluations. On currency revaluation page, there is also a revaluation report which shows the revaluation on each account. |
Year-end checks
At the year end, your accounts should show that the foreign currency accounting requirements have been fulfilled. Furthermore, the Debtors: Translation differences account should be zero. You can check that these objectives have been met by following the steps below:
Foreign currency transactions have been translated to base currency at the rate on the day of transaction (or average rate)
You can check the amount in GBP that transactions were translated to by running the transactions report: Display > Transactions report. If these amounts are not correct you should correct them using the method explained in Foreign currency transactions have been entered at a wrong exchange rate.
Monetary balances in foreign currencies have been re-translated at the year end exchange rate
1.Display the balance sheet by selecting Display > Balance Sheet
2.Select the tab labeled in the foreign currency, e.g. EURO - this displays the monetary balances (e.g. bank, customers, suppliers) in that foreign currency:
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3.Click on Currency amounts to display these balances in the base currency
4.Each balance in the base currency should equal the balance in the foreign currency translated at the year-end exchange rate. If it does not, check that you have performed the year-end revaluation correctly. You can check if the year-end revaluation has been done by selecting Display > Currency revaluations, which lists all revaluations.
The Debtors: Translation differences account should be zero
The balance in the translation differences account should be zero as this is a temporary account which clears when a currency revaluation is done. If there is a balance on the account this could be due to the following causes:
•The previous revaluation was dated earlier than the latest currency transaction
•Revaluations are not carried out in chronological order
•A revalued currency transaction has been deleted
•A previous revaluation has been deleted
To check the balance, select Display > Accounts > Debtors > Translation differences. If there is a balance you can clear it by carrying out a currency revaluation (Set up > Currencies, departments and lists > Revalue currencies) even though the rates have not changed (i.e. revalue but don't change the rate). This will transfer the balance to the Expenses: exchange differences account.
Correcting foreign currency errors
If your accounts show that the foreign currency accounting requirements have not been fulfilled, see Correcting foreign currency errors.
