First, QuickBooks multi-currency support is off by default. It’s a company preference on the Edit->Preferences->Multiple Currencies menu. Once support for this feature is turned on for a particular company file, it can’t be turned off. When you track multiple currencies, you need to specify the home currency, which for US-based businesses is the US dollar. At the end of our review, we’ll see that one impact of tracking multiple currency transactions is that QuickBooks will automatically create an Other Expense account named Exchange Gain or Loss to record unrealized foreign exchange-related gains and losses.
To get oriented, access to multi-currency features are on the Company->Manage Currency menu.
QuickBooks 2009 offers the ability to download the latest exchange rates. As you can see from the Currency List captured after completing the download, exchange rates for only 12 of the most actively traded currencies were available. If you’re using a currency for which exchange rates aren’t readily available, you’ll have to enter that rate manually.
There’s also a Currency Calculator that can calculate the home amount, foreign amount, or exchange rate. The home amount (e. g. US dollars) is the product of the exchange rate and the amount of the foreign currency. The foreign amount is the result of dividing the home amount by the exchange rate. The exchange rate is the result of dividing the foreign amount by the home amount.
Home Currency Adjustment is used at the end of an accounting period to adjust your balance sheet accounts to reflect exchange rates on the balance sheet date. Balance sheet accounts are adjusted up or down by the amount of the unrealized gain or loss and posting the offsetting debit or credit to an Other Expense account. By default, the Other Expense account is named Exchange Gain or Loss. Until a home currency adjustment is recorded, balance sheet accounts represent the value in the home currency at the exchange rates used at the time each transaction was recorded. If the exchange rate has increased, your home currency buys more of the foreign currency, so the home currency adjustment will result in an unrealized gain. Home currency adjustments are calculated based on unrealized gains and losses. For example, for a customer invoice, gains or losses are unrealized until payment is received; after that, they’re realized and a currency adjustment is no longer applicable. QuickBooks 2009 provides reports for both unrealized and realized gains/losses, so we’ll see this in greater detail when we review these reports and the impact of entering a transaction that originated in a foreign currency.
Rounding out the Multiple Currency menu are 2 help tools. There’s a link to a multicurrency overview in the QuickBooks help file. There’s also a link to the Multicurrency Resource Center. Unfortunately, at this writing, this link just opens the QuickBooks integrated web browser and navigates to a general link that doesn’t contain information on using multiple currencies. Since foreign exchange is a new topic for QuickBooks users, hopefully Intuit gets a specific link up soon.
Let’s see how QuickBooks multi-currency accounting affects some typical transactions. Before we can enter transactions in a foreign currency for a customer or a vendor, we have to specify the currency in which all transactions for that customer or vendor will be recorded. If there are no transactions, we can edit an existing customer or vendor; otherwise, we’ll have to create a new record. We’ll start by creating a new customer and specifying that this customer will be accounted for using the €, or Euro. Next, we’ll produce a customer invoice but we’ll change the exchange rate to 1 Euro (€) = 1.5 US dollars.
At this point, because the customer invoice has not been paid, any foreign exchange-related gains or losses are unrealized. So let’s generate the Unrealized Gains & Losses Report by first entering the exchange rates for those currencies for which there are outstanding transactions.
Next, let’s record receipt of the customer’s payment in full. Both the invoice and the payment will be recorded in the same currency, the Euro (€). We’ll change the exchange rate to 1 Euro (€) = 1.25 US dollars to reflect a change in the exchange rate. Because this invoice has been paid, any foreign exchange related gains or losses have now been realized, so they’ll show up on the Realized Gains & Losses Report.
We’ll wrap up our review of this simple multicurrency transaction by looking at the impact on the company’s records. Press the Journal button (or alternately, Ctrl Y) while viewing either the customer invoice or payment to see the specific entries QuickBooks made. The Journal for our Invoice transaction shows the debits and credits for that transaction. Next, let’s go back in time to before we entered the customer payment to review the unrealized gain or loss that would be recorded by entering the home currency adjustment described above. That’s the adjustment at the end of an accounting period to reflect exchange rates on the financial statement date rather than the original transaction date.
Let’s start with the Profit & Loss by running the Profit and Loss Standard report from the Reports->Company & Financial menu and pressing the collapse button. Here we’ll see the default account Exchange Gain or Loss created by QuickBooks when we enabled multi-currency tracking in our company file.
Finally, let’s review the Balance Sheet. Note that in order to demonstrate another aspect of multi-currency, this balance sheet was prepared as if the customer payment had not been received. It’s also based on recording a home currency adjustment as depicted above, where we changed the exchange rate to 1 Euro (€) = 1.75 US dollars. We’ll see that our customer receivable has been adjusted up by $250 because of the change to the exchange rate between the date we billed the customer and the date we entered the balance sheet. The upward adjustment matches gain reported as an Exchange Gain or Loss. Since our Exchange Gain or Loss account was an Other Expense account, the gain is shown as a negative expense. Once multi-currency tracking is enabled, balance sheet subaccounts will be created automatically for every currency with transactions.
Multi-currency tracking is one of the most powerful new features of QuickBooks 2009. Now it’s time to generate more foreign business!