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Reporting Exchange Gain/Loss

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I am doing some long awaited bookkeeping (don't ask) and need to understand better how to declare exchange gain/loss on foreign currency transactions. To date I've been recording payments I make in US dollars (out of my Canadian PayPal, Bank or Credit Card acct) as the amount as it reads on the final bill. For example, if a contractor bills me for $100 USD and 3 days later I make a PayPal payment out of my Cdn bank account, it might show on my bank statement as $110 Cdn drawn from my bank acct.

 

However, after having a professional bookkeeper do my books I see that sometimes she shows a separate journal entry for exchange gain/loss on foreign currency. Usually if the payable was paid not on the same day it was created. Make sense so far?

 

This seems rather tedious but I want to understand how to enter these transactions correctly.

 

Also, the odd time a client pays me in US funds instead of my home currency (Cdn). What is the right way to enter the account receivable and then the payment, usually at a later date? NOTE that I do NOT use multicurrency in Quickbooks Pro 2009 so I need another way to handle.

 

Oh Candy ... where are yooooooooooou? :whistlin:

 

Karri

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Hi, Karri:

 

You basically need a "slush" account called "Currency Exchange" that is an "Other Expense" account in QB. (Or an Other Income account, doesn't really matter.) If your client pays you the full amount, then you need to record their A/R as paid. If the amount that hits your bank account three days later is $1.50 less, due to currency fluctuations, then you would do the following:

 

Use the "Create Deposits" function to start the deposit. It will suck in the customer's payment.

 

Underneath the customer's payment, create a second line in the deposit screen that points to your "Currency Exchange" account. Enter a negative $1.50 on this line.

 

The two lines together will add up to the correct deposit amount. The customer's payment will be properly recorded. The bank account will balance. And there will be peace on earth (at least that's how I feel when everything balances!!).

 

HTH!

Deb

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Guest

Thank you Deb :) So basically you're saying that it's a matter of timing? i.e. if there is a time lag between creation of the payable or receivable and when the money is actually paid/received (respectively) then you must declare the exchange loss/gain? This is how I understood it.

 

Most of the time, say if a contractor bills me in USD, I pay in USD but the moneys ultimately come out of my Cdn bank account. If I pay the contractor on the same day they bill me then I wouldn't have to declare exchange gain/loss, correct? Only if I create a "payable" (bill in QB) and pay them at a later date??

 

Sorry if I'm being thick. I'm pretty good with books but it's not my specialty ;)

 

Thanks again!

Karri

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Karri: That's exactly right :) If there is any delay, then there's the chance for a currency fluctuation that has to be accounted for. You can assume that the currency fluctuates both up and down, so some days you'll be adjusting your deposit up and some days you'll be adjusting it down.

 

Deb

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Hi Deb - So does that mean I have to check the currency fluctuations on xe.com for every single multi-currency trx that happens over a period of time (versus straight across USD-CAD and CAD-USD bills/payments)?

 

Is there a "fast" way to do this? (I know there probably isn't but thought I'd ask :))

 

Karri

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Karri: From a practical perspective, the main goal is reporting the difference between what you billed and what you were paid. Assuming the client paid their bill correctly, you wouldn't need to look up the exchange rate at all ... you'd just report the difference as currency exchange. I would think that checking the rates every day would drive you crackers after a while!

 

Perhaps I'm oversimplifying the matter and someone else can chime in .... !

 

Deb

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Okay, I'm going to put down some scenarios here to make sure I understand (bear with me ...):

 

1) Jane Contractor bills me $100USD March 1.

2) March 5 I pay her bill through PayPal which pulls the funds from my CAD bank account.

3) My bank statement at the end of the month shows a debit (withdrawal) for $125CAD to cover the US invoice.

 

Journal Entry would be this?

 

Dr Subcontractor Fees $125

Cr Biz Bank Account $125

 

OR would the JE be:

 

Dr Subcontractor Fees $100

Dr Exchange Gain/Loss $25

Cr Biz Bank Account $125

 

OR none of the above given there is a time differential from when the payable was created and when I paid it and so there is an additional currency exchange fluctuation I need to incorporate in the entries?

 

Argh!

 

See where I'm confused?

 

And what if I pay the contractor's US dollar invoice on the same day? Do I declare the exchange gain/loss or just the straight across amount converted into the CAD dollar equivalent?

 

THEN, going the other way: I have the odd client who does pay me in US dollars into my PayPal account. But when I w/d the funds into my Cdn bank account the money is exchanged into Cdn dollars. For example:

 

1) Joe US Client deposits $50USD into my PayPal account March 1.

2) March 10 I withdraw my PayPal US dollars into my Cdn bank account.

3) On my March statement at the end of the month the March 10 deposit into my account shows as $65.

 

Journal entry would be?

 

Karri

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Guest Pat Z.
Journal Entry would be this? NO

 

Dr Subcontractor Fees $125

Cr Biz Bank Account $125

 

OR would the JE be: YES

 

Dr Subcontractor Fees $100

Dr Exchange Gain/Loss $25

Cr Biz Bank Account $125

 

Karri - you always want your income and expense accounts to reflect what you actually paid or received. For example, your sub billed you $100, so you would record as $100 - it cost you $25 extra to pay the sub - you don't have that reflect on payments to the sub, you have it reflect on a conversion charge (expense or income) as a cost to your business. Does that make sense?

 

And what if I pay the contractor's US dollar invoice on the same day? Do I declare the exchange gain/loss or just the straight across amount converted into the CAD dollar equivalent? In my mind, timing does not matter at all - this conversion charge is an expense (or income) to your business and really has no bearing on the contractor or the time you pay the bill

 

THEN, going the other way: I have the odd client who does pay me in US dollars into my PayPal account. But when I w/d the funds into my Cdn bank account the money is exchanged into Cdn dollars. For example:

 

1) Joe US Client deposits $50USD into my PayPal account March 1.

2) March 10 I withdraw my PayPal US dollars into my Cdn bank account.

3) On my March statement at the end of the month the March 10 deposit into my account shows as $65.

 

Journal entry would be?

Income $50.00

Conversion Charge $15.00

 

Does all this make sense? I also sent you a breakdown of how I balance Tawnya's. Let me know if you need any clarification.

 

Karri

 

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Thanks Pat!

 

Oh - just got your email - yay! Thanks :)

 

Maybe there's hope! lol.

 

Karri

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I have to respectfully disagree with Pat, I'm afraid. The $25 is just the difference between $100US and the equivalent in CAD. I would do the following:

 

1) Jane Contractor bills me $100USD March 1.

Dr. Subcontractor fees $125CAD (or whatever $100USD equals on that day)

Cr. Accounts Payable $125CAD

 

2) March 5 I pay her bill through PayPal which pulls the funds from my CAD bank account.

3) My bank statement at the end of the month shows a debit (withdrawal) for $125CAD to cover the US invoice.

Dr. Accounts Payable $125CAD

Cr. Biz Bank Account $125CAD

 

The time when the Currency Gain/Loss comes into play is when you enter the bill for $125CAD (because that's what $100USD equals on the day you receive the invoice), but $124CAD comes out of your bank account because of the weak dollar. In that case, the second entry would be:

Dr. Accounts Payable $125CAD

Cr. Biz Bank Account $124CAD

Cr. Currency Gain/Loss $1CAD

 

Translating CAD into USD or vice versa shouldn't generate a gain or loss. So if you enter a bill and pay a bill on the same day, you're using the same exchange rate, and there's no exchange gain/loss.

 

HTH!

Deb

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Guest

Aha! Okay Deb, this was sorta kinda what I thought to be correct. Yet how to capture this on the books retroactively seems very clunky. i.e. I would first enter the contractor invoice as a "bill" (Quickbooks) for $125 CAD. But to make that entry I would have to go to say xe.com and check what $100USD was in CAD dollars on the day the payable was incurred.

 

THEN, when I enter the actual payment I made 5 days later (for argument's sake), I would enter $124 CAD and $1 Exchange Gain/Loss (both dr with a cr to the payable to clear it out).

 

Thanks again Deb. I'm learning :)

Karri

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Klunky, you betcha! I guess, if you trusted your subs and clients, you could just assume that any difference in what you initiated and what eventually cleared the bank should be put to exchange gain/loss. Otherwise, I'd just make xe.com your homepage!

 

Deb

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Guest Pat Z.

Deb -

 

My first knee jerk reaction to your response was kind of funny (being a type A personality ;) ) I was like a little whiny kid because I finally got this to work and now being told I'm doing it wrong *chuckles*.

 

The more I pondered, though, I realized that I'm not doing it wrong, just differently. I guess I had it in my head that you shouldn't inflate the amount you paid to a sub-contractor, but in this case, it makes no difference - it's not like they get a 1099 at the end of the year. My other thought was that it's a good idea to track how much you are actually paying in rate exchanges - you know, does it fluctuate enough to even out eventually? Is it costing me too much to hire that US sub? I guess it depends on what information you want to get out of it when all is said and done. You can flip that coin, though, and add the exchange rate to your subcontractor expense and see what hiring that particular sub is actually costing you in the long run.....

 

Anyway, thanks so much for the clarification - I love learning new techniques and Paypal was a hard one for me to get a handle on, so any help from the masters works for me...

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Okay, there's 2 ways of thinking of this (somehow I missed this post!)... this is why I just don't do Canadian bookkeeping!

 

I see the merit of both ways, but Deb is mostly correct as far as I know...

 

See, you want to think in YOUR terms. Your books are for YOUR costs. If CDN$125 = US$100, then you are going to record that $125 as YOUR cost. The subcontractor would record the $100 as THEIR cost. The difference? It doesn't matter, because they are the same and in separate books.

 

I would also use a little expense account to account for those small fluctuations. It gets a little more interesting if you are doing it after the fact and don't really use a hard and fast A/P and A/R system, I would just ignore the fluctuations and enter them as recorded on the bank statement.

 

Pat - I would do it your way if I had a US and CDN bank account was mixing currencies in a file or something weird like that (hey, I have some clients that well, you never know!)

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Not, to be a stickler, but I think everyone is losing sight of the fact that your books should be kept in only one currency. My books are kept in USD. Karri's books are kept in CAD.

 

Let's look at a different scenario. Karri finds a client in Mexico City and does a quick project for him. She sends him a bill for $100CAD. He gets the bill and pays her the same day .... with 1,197 Mexican Pesos. Should she mark the bill as paid with a $1,097 "currency gain"????? Heck, no. He paid her in a different currency, but it is the equivalent of $100CAD. That CAD equivalent is what she marks as his payment.

 

The fact that the USD and CAD are so close in value shouldn't distract you from the fact that they are different currencies.

 

Deb

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