Accounting for Foreign Currency Transactions 101

You, like every entrepreneur, get a pop of positive emotions each time a new client signs the contract. It’s even a bigger achievement to start working with somebody abroad, meaning you are operating an international business! And with foreign clients, you are very likely to work with foreign currencies.

What is a foreign currency transaction?

We’ll need to clarify two concepts: home and foreign currency. Home currency is usually the one where your company is registered—US dollars for companies in the 50 States, the British pound sterling in the UK, the Euro in the 19 EU countries, etc. You may also hear or use the term “local currency,” “functional currency,” or “company currency,” which are the synonyms of home currency. The foreign currencies are all the rest except the one you set for your business.

Foreign currency transaction requires tracking of the current exchange rate between your home and foreign currency. That sets the ground for our main topic of foreign currency transactions accounting.

Foreign currency transactions accounting

Your clients may have different requirements and could ask you for some flexibility in payment terms, including the currency. Accounting for foreign currency transactions in these cases can become challenging. You will need to issue invoices in foreign currency, convert currencies, move money between different currency accounts, keep track of exchange rates at specific dates, and even convert taxes like VAT/GST/HST in accordance with reporting requirements where applicable.

Business transactions in a foreign currency impact your daily accounting as you need to convert all foreign currency payments, invoices, expenses, loans, and deposits into your company currency. In general, every foreign currency transaction accounting should include a calculation of the amount in your company currency, using the exchange rate on the day of the transaction or as required. Also, any foreign currency held, any amounts of currency that you owe, and so forth, should be converted into your company currency using the rate in force on the date of the report for the balance sheet preparation.

If your foreign currency transactions result in gains or losses, you should include these in your profit and loss account. It is important to remember that holding assets and certain liabilities in a foreign currency impacts your balance sheet because their value fluctuates with exchange rate movements. It is called unrealized gain or losses.

Accounting for foreign currency bank accounts

Manual filing of the amount in your multi-currency transfers between bank accounts is tedious and exhausting. Moreover, accounting for foreign currency bank accounts can quickly get out of hand.

Let’s take an example: you transfer 1000 GBP to your USD bank account. The GBP bank statement usually doesn’t have information about the exact amount of USD received or the commercial exchange rate unless you check your online banking for further transfer details. Alternatively, you have to compare your GBP account statement to the USD bank statement to find the final amount or recall it if that was you who did the transfer. It often takes hours to match your own transfers between accounts in different currencies. Is it possible to automate? YES

Tracking the exact conversion amounts and rates is just one source of complication. Let’s dive into taxes in foreign currency.

Accounting of taxes in foreign currency

You may have many tax registrations in different countries like VAT tax ID in the United Kingdom, VAT tax ID in Italy, VAT tax ID in the Czech Republic, or GST tax ID in Canada. Each country’s tax authority has its currency of reporting. Sounds like a full-time job or a good reason to hire an accountant, right?

Even if you invoice your clients in dozens of currencies and report VAT and other sales tax alternatives throughout the world in their own local currencies, it doesn’t mean that you have to face the complications we discussed above. As it is often the case in the 21st century, modern software is your best solution and superhero. Is it real to assign its own currency to every tax agency you have and automatically convert the amounts? Why not?

Multi-currency accounting software

Fiskl is your multi-currency accounting software that aims to streamline and automate your accounting. Fiskl automatically matches and lists multi-currency transfers for connected bank accounts. All you have to do is to select the right currency equivalent in the corresponding bank account from the list of options Fiskl prepared for you. That action also removes duplicate transactions, which is always the case with the transfers between your own bank accounts.

You can have as many currencies as you want for every client in your Fiskl account. You have the option to select the currency for every single invoice you send. No need to create a new client each time you want to send them an invoice in a new currency. This makes Fiskl the most business-friendly multi-currency accounting software on the market.

With Fiskl, you don’t have to worry about manually converting your VAT into CZK currency, for example. Suppose you are VAT registered in the Czech Republic, and your business is registered in the UK, which means your company currency is GBP. Then you can simply create a new TAX ID (VAT registration number you got from the Czech Republic tax agency) in the “manage taxes” section and set its own currency like CZK from our example.

This simple action will allow you to have automatically converted the VAT amount into that selected currency in the VAT payable account for each sale made. You may have as many tax IDs in the system as you need, and each of them can have its own currency. Fiskl automates currency conversion for you based on the official mid-market daily exchange rates. Now you can track clear and precise balances with local tax agencies around the world by only creating the new tax ID with its own currency when you get your tax registration.