We transfer monies from bank account (in GBP) to currency exchange account, where GBP was converted to EUR and then we paid suppliers in EUR directly from currency exchange account.
I created a new nominal code called online currency exchange account under current assets and I am considering if the name of this nominal account is correct or I should use different name and if the balance of this account should be presented on balance sheet under debtors or cash?
Many thanks,
Anna
-- Edited by Anna88 on Monday 7th of March 2016 05:55:56 PM
-- Edited by Anna88 on Monday 7th of March 2016 06:01:09 PM
For me I'd create the account to land near bank in the bs. I'd transfer any loss or gain to the profit and loss - in relation to loss or gain made through exchanging. Others may have different views.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
There will be no any loss or gain in relation to exchanging as I posted EUR supplier invoices in GBP using the same exch rate which exchange office used to convert GBP to EUR.
I made the following postings:
1. Transfer monies to online currency exchange account in GBP: Dr Online currency exchange account Cr HSBC Bank
2. Post EUR' supplier invoices in GBP using the exch rate which was used by online currency exchange office to convert GBP to EUR: DR Expenses account (in GBP) CR Accounts Payable (in GBP)
3. Make payments using online currency exchange account: DR Accounts payable (in GBP) Cr Online currency exchange account (in GBP)
So, the balance of online currency exchange account should I classify under cash at bank and in hand in the balance sheet?
Many thanks for your help,
Anna
-- Edited by Anna88 on Monday 7th of March 2016 07:30:09 PM
I have only 3 invoices and each of them after converting from EUR to GBP is for around £1,500, so in total give me £4,500.
Firstly I transferred £6,000 to online currency exchange office, where I sold £6,000 and bought 7,680. Then I paid suppliers in EUR directly from online currency exchange office account in EUR.
In the accounting software, I posted EUR's invoices in GBP using the same exch. rate that online currency exchange office used to convert GBP to EUR and then I paid them in GBP from Online exchange currency account.
Journals which I made:
1. Transfer monies to online exchange office
Dr Online currency exchange accoun
CR Bank
Amount £6,000
2. Post EUR' supplier invoices in GBP using the same exch rate (1.28) that online currency exchange office used to convert GBP to EUR. Supplier invoice: 2,000 ( £1,562)
Dr P&L account
Cr Account Payable
Amount £1,562
3. Make payments in GBP from online currency exchange account:
Dr Account Payable
CR Online currency exchange account
Amount £1,562
The balance of online currency exchange account at the year end is around £3,000 and I am considering if I can include as cash at bank and in hand in the balance sheet? If you need more information, please let me know.
Many thanks, Anna
-- Edited by Anna88 on Wednesday 9th of March 2016 05:14:20 PM
Hi Anna
When I asked my Q - I was just thinking of forex/hedging possibilities but your client would need to be doing considerably more in euros. As an aside though - why not have a euro account with your Bank? Much easier for managing both cashflow and viewing what is going on, unless of course you can get access to see the exact balances held/charges for exchange and admin fees of the currency exchange account, which you should have really to verify and produce the accounts.
(Plus there is still the issue of the difference in the exchange rate between purchase of goods and actual payment and any overhang at period end.)
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Fair enough if you pay immediately for the goods and you've the invoice in your email account. If however you commit to buy from the states today for instance, order gets accepted at whatever the rate - next month you pay and the exchange rate changes, there will be either a loss or gain to account for. Not sure if this business is VAT registered either. If I've misunderstood the initial Q I apologise, just to me, you will have either a loss or gain to account for.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
I assume that you were answering Anna in your post rather than Joanne.
As Joanne states, holding bank accounts in the currency of the countries that you are dealing with avoids exchange rate variances (no loss, no gain as you deposit the funds at the prevailing exchange rate at the time of purchase).
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Shaun, yes, well I was sort of continuing to mumble lol. I guess the detail is all in the type of account then. So can I assume that the exchange bank account locks in the value on the day? I'm not sure I like that - with the exchange rate going up and down. I guess you'd have to make an educated guess on whether the money market is going to be in your favour next month for instance
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
quite Johnny but there is no loss or gain to worry about accounting for.
if you didn't use currency hedging then you have to account for exchange differences as an exchange gain or loss through the P&L / Income statement.
if you do use a foreign currency bank account then everything exists within a foreign currency bubble where there is no gain or loss on the purchase.
People can make a good profit by betting on exchange rates being in one's favour so it all really comes down to a businesses risk appetite as to whether they go with the safe option of the purchase happening at a known rate by putting the money in the currency in question into the foreign currency accountat the time of purchase. Or, converting at point of payment and risking an adverse movement on exchange rates.
I suspect that people will want to hedge currency transactions a lot at the moment as over the next three months the pound is set to fall on the uncertainty over leaving Europe then on the 24th of June no matter which way the vote goes once certainty returns to the market people will be going the other way on the basis that sterling will rise against the dollar and Euro.
Of course, the above is simply my view on the likely movement of exchange rates. It is at best an educated guess and people shuld NOT act upon this as though it is a legitimate prediction.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I think that the way Anna has done it has locked in the exchange rate for the value of her invoices (although she seems to have bought more, unless Ive missed something in her posts)
Certainly as Shaun suggests - depositing the funds into a euro account when you buy the product in readiness for the invoice coming in helps you with then knowing what the rate is for purchase of those products, although in part I was also suggesting the Bank euro account for a few other reasons. Not least because usually such online companies, despite the blurb, take either extortionate charges (doesnt appear to be the case here) or its no fees but these are effectively reflected in the exchange rate. Often the exchange rate is a couple of basis points out on what the Banks would convert at. Dont forget also there is always a difference between the buy and sell rates and a huge difference between the cash currency and commercial forex spot rates. Spot rates wil change during the day. With the Bank currency account, Im sure you can control it better when the movement of funds takes place, funds are secure (Bank guaranteed up to £75k - currency exchanges are not) and having better visibility.
However, there is always an opportunity for a loss or gain even with this method. Some of it may just be a 'book' difference, some may create a real difference. You could have gained a better rate had you waited to do the transfer (or a worse one of course). You may end up with not enough in the account to cover the actual invoice or carry too much. The goods may not arrive and you may ending up sourcing goods in the UK and not have the requirement for that currency any more so then you may need to move funds back to sterling so take a hit at that point. Markets can be very volatile as Im sure you know.
I wasnt going to suggest Money markets type forex swaps, but more vanilla forex products. Or perhaps forex options just to provide some certainty on the rate, with the option not to take it if events conspire against you or in fact if the rates go more in your favour, but as I say this one is nowhere near big enough, so the problem is always going to be an almost speculative purchase /sale of currency.
Anna, you mention buying £6000 worth of currency when you had only £4500 invoices so you have bought in excess of your requirements plus will have a balance in the euro exchange account at the end of the year - how will you reflect this in the accounts? Certainly if converted at that point you will not be getting the 1.28 rate. What you have done has given you SOME certainty, but can still leave a paper gain/loss to be accounted for and/or a real one (assuming Ive not misread your post).
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
quite Johnny but there is no loss or gain to worry about accounting for.
if you didn't use currency hedging then you have to account for exchange differences as an exchange gain or loss through the P&L / Income statement.
if you do use a foreign currency bank account then everything exists within a foreign currency bubble where there is no gain or loss on the purchase.
People can make a good profit by betting on exchange rates being in one's favour so it all really comes down to a businesses risk appetite as to whether they go with the safe option of the purchase happening at a known rate by putting the money in the currency in question into the foreign currency accountat the time of purchase. Or, converting at point of payment and risking an adverse movement on exchange rates.
I suspect that people will want to hedge currency transactions a lot at the moment as over the next three months the pound is set to fall on the uncertainty over leaving Europe then on the 24th of June no matter which way the vote goes once certainty returns to the market people will be going the other way on the basis that sterling will rise against the dollar and Euro.
Of course, the above is simply my view on the likely movement of exchange rates. It is at best an educated guess and people shuld NOT act upon this as though it is a legitimate prediction.
Lol, saying the same but slightly different angles there,with me here being the more pessimistic (thinking of losses in the eventuality you cant use what you bought so there is no loss on purchase, but there may well be on dumping the remaining currency balance - having seen the carnage when that happens).
There will be hedging going on both ways already Shaun. Which will involve some newly dreamed up hedging instruments,with floors, ceiling and a few other fancy tricks (and a puddle outside!)
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Hi. I can see the benefit to the account if the pound has signs of being weak in the near future. If it is expected to be strong wouldn't it be better to use exchange rate on the day of paying for the invoice? Getiing more euros for your pound? Just a thought.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
If the banks feel that sterling has dropped below its true level there is likely to be a buying frenzy on sterling which would push the price up when it should be dropping so you can very easily find yourself on the wrong end of a bet when everything suggestes that sterling is not where it is supposed to be.
Pump n dump works the same with currencies as it does with shares... Both need to come with a public wealth warning.
Never try to outguess the market.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
What I'm getting at is a currency exchange bank account surely isn't always the best option. At best you'll stay level - using exchange rates on the day, yes you can lose, you can also gain. Admittedly the bank account is stable, and stability is the way to go - yet as I say you'll never get a gain.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
