How to record a transfer from a foreign currency bank account
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How to record a transfer from a foreign currency bank account
If your business frequently makes sales or purchases in a different currency than your primary Business Currency, there's a good chance you have one or more Foreign Currency Bank Accounts.
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Oops! Looks like this content is meant for a different version of our accounting application?Hi Paul,
Thanks for your post.
Apologies, it is very detailed, but I personally found it a bit hard to follow.
I sent an invoice in GBP to a foreign customer, but he transferred the amount in EUR.
In my bank account I see the payment in GBP, which is lower than what shown on my invoice.
You mention about adding a new account to the Charts of Accounts, but there is already a system account called Unrealized Gain on Foreign Currency.
What should I do next?
Sorry, I am slow.
Many thanks.
Cheers!
Hey @niksnik, this article pertains to an older version of our accounting software. So, if you're logged into your Wave account when viewing it and are on our new system, or are not currently logged into Wave, this article is will be hidden.
@234537 great question! Because there is already an Unrealized Gain on Foreign Currency account on your Wave profile, you can carry on by using that one without having to worry about generating a new account in Chart of Accounts. And thank you for catching that it's a pre-loaded account, I'll bring this up to our team!
will this post be updated to the new version?
@Julka in the new version of Wave, conversion occurs automatically. You can test this out by transferring an amount between two accounts of different currencies. You will see that the converted amounts are calculated and displayed in Wave immediately.
the exchange rate Wave uses to convert the foreign currency transaction is different from my bank. Now the bank balance per the bank statement is different from Wave. I tried to look for a field in Wave to adjust the exchange rate. But I couldn't find any field available to amend the exchange rate. Please advise what could I do. Many thanks
At this time, the current conversions of foreign exchange transactions are based upon xe.com's daily rate conversions, so this is a known limitation of the current version @Yoli. There aren't any workarounds for this right now, although we're in the midst of looking for a new method of calculating the way forex rates are applied to multi-currency transactions in Wave.
So let me get this straight. Wave has decided how it will convert my multiple currency transactions and even though Wave is aware that this will not match up with local bank statements or other accounts on reconciliation, it was introduced by the product time on a live product that has a huge importance to any business using it with NO workaround?
Why are you converting my transactions automatically and not letting me do this at a specified rate that matches my bank?!?
@mrl14 Thanks for your feedback here -- Wave uses www.xe.com for current foreign exchange rates (for transactional data etc). With that said, if you are creating a Bill/Invoice in Wave, you can select the currency that it's associated with rather than from the transaction page itself.
My workaround was to just create all USD accounts in CAD currency and name them 'account name USD'. Although I will say in many instances I was unable to rename or change an account with no transactions. Very buggy software. You guys have a lot of work to do and you really need to do a better job of understanding your audience and their needs. It really seems like the product people at Wave don't know anything about accounting and how businesses use this software. Anyways, I was desperate to file my taxes and I think I found a way to make this work, although with much frustration
I agree with mrl14 on the issue of adjusting exchange rates...consumers typically do not get the rates listed on currency conversion websites. You have to be able to adjust it per one's bank statement or invoice statement. Otherwise, the software is not usable for businesses and I'm afraid if this can't be resolved, I'll be looking at another software. I applaud the fact the program draws automatically from XE.com or otherwise, but Wave needs to make it an editable input.
Hi there @BWard @mrl14 @Yoli ,
Let me take a shot at explaining what's going on here. And I'd like to start in a weird place: I'd like you - for as long as it takes to read this comment - to stop thinking about foreign currency in terms of money, and to think of it in general terms as "stuff" with flexible value.
Secondly, if you've ever been inclined to think about this whole area as "multi-currency accounting", please also put that out of your mind: accounting systems account in your home currency - the currency that you file your taxes in. Some, like Wave, track "stuff" called foreign currency, but it is all tracked by reference to your base, home currency.
Alright, that sounds super-conceptual. Let's make this more tangible, and to do so I'm going to create a brand new Business in Wave. My new business is going to be a US business, with a base currency of USD. And I'm going to set it up with 2 checking accounts: USD, and CAD.
So, let's make a start: imagine that 1 year ago I deposited CAD1,000 into the CAD checking account. Here's what we see:
As this screenshot shows, I have deposited CAD1,000 to start my business, which comes from Owner's Equity. But look at the 'All Accounts' total in the top-left: $795.18. That's US Dollars - the home, or 'base' currency that I chose for this business. Wave has seen that I have an asset - "stuff" - worth US$795.18. If I ran my balance sheet now, that's what we'd see.
Understanding this is so important to understanding foreign currency accounting: if I go to my bank, they'll give me a statement that says I have CAD1,000 in your CAD Checking account, but from an accounting perspective my assets total USD795.18.
OK - so now let's see something weird. It's one year later, and I'm going to go down to the bank and withdraw my CAD1,000. Let's record that:
So, I put in CAD1,000 to my Canadian Dollar Checking Account a year ago; I haven't recorded any interest; and I've just gone and taken out CAD1,000. Check out the value of the "All Accounts" total: $41.16! How can that be right?
Well, in "accounting land" it is right: I started by injecting into my business US$795.18 worth of an asset called Canadian Dollar (valued at Feb 2018 exchange rates). A year later I withdrew US$754.02 worth (at Feb 2019 exchange rates) of an asset - which just happens to be the same asset. So, logically, the difference of US$41.16 must still be in my business. And if we go check out the Account Transactions report, that's exactly what we'll see:
Now, at this point you might want to object that Wave has used the wrong exchange rates, because those aren't the rates you get when you change money at the bank. But we haven't changed money at the bank, so Wave is quite right using its up-to-the-moment exchange rates.
But let's change this - let's introduce an actual exchange by turning that CAD1,000 withdrawal from an uncategorized expense into a transfer to our USD Checking account. Here goes:
As you can see, as soon as I recorded the transfer, Wave has automatically created the deposit in the USD Checking account for its calculated value of US$754.02. Now this number, we're going to have to change - because there's no way my bank's going to give me full value when I exchange currencies.
In the previous version of Wave, when you did a transfer between bank accounts, you needed to back-calculate and overwrite the exchange rate to match the value you expected. In the current version, it's much simpler: just change the resulting value to whatever it should be!
So let's say the amount of US$ I actually got in the transfer was $30 less: US$724.02. I'll go right ahead and change that now:
That's pretty easy - but how can we get away with just changing a value like that? Doesn't there need to be a double-entry? Indeed there does - and Wave has taken care of it for us. Let's run the Profit and Loss report for the year, and see what we have:
So, I transferred US$754.02 worth of Canadian Dollars (CAD1,000) to my USD Checking account, and received only US$724.02, meaning I took a loss of $30 between the 'booked' value of my Canadian Dollars and what I actually received. And sure enough, there's US$30 of Loss on Foreign Exchange sitting on my P&L Report.
We've made sense of nearly everything, but there's one more thing to look at. Take a look at the Assets on the Balance Sheet:
As far as Wave is concerned, the net value (in US$) of my CAD Checking Account is still US$41.16, so Wave is calculating my total assets as US$765.18, when really all I have is the US$724.02 in my USD Checking account. This is because Wave does not auto-clear currency gains and losses in foreign currency bank accounts. And this means that - either at your year end, or any other time you want to run a precise and detailed Balance Sheet, you'll need to account for gains/losses.
The way to do this is always 3 steps:
1. Look at the foreign currency value of your foreign currency account, and create an income or expense transaction for that amount, so that you reduce the foreign currency account to a nominal zero value of that foreign currency.
2. Now check the 'home' or base currency value of that account, and post a Journal Transaction to reduce it to zero in your base currency.
3. Delete the income or expense transaction that you created in Step 1, to reinstate the correct foreign currency balance.
We've actually done Step 1 already - my CAD Checking balance in CAD is already zero, so we can skip that.
For Step 2, I have a US$ valuation of my CAD Checking account sitting at US$41.16. I want to reduce that to zero, and to reduce the value of an Asset account I post a Credit in my Journal (Asset accounts increase with debits, and reduce with credits). The Debit side I'll post to Loss on Foreign Currency Exchange, which is an Expense Account. This obviously makes sense, because according to my accounting I still had value in my CAD Checking Account, and it's gone away, so that must be a loss.
Right! We're done! If we take another look at the Assets section of the Balance Sheet, this is now correct - just the USD Checking Account:
And on the Profit and Loss Statement, the loss on exchange adds to the loss when we got hit with bank exchange costs. Everything is balanced and up to date:
Tip: We didn't make any special income or expense transaction to zero the CAD Account in CAD terms at Step 1 - it was there already. If you had done so for your period end, you'd delete that transaction now!
This has been quite a journey - thanks for sticking with me! Accounting for foreign currency can be hard to get your head around at first, but it is fundamentally logical - particularly when you remember to think of foreign currency just as 'stuff', like inventory, raw materials, stationary, or any other asset you have around that can increase or decrease in value.
Hope that helps. Happy foreign currency bookkeeping!
I found this a comprehensive and useful thread and whilst it makes sense in writing it doesn't appear to be working for me in Wave. I have two fairly major problems:
1) Creating a transfer from a USD bank account (which is my base/home currency) to an MYR (foreign currency) bank account doesn't record the currency gain/loss when I adjust the MYR amount (per your example this would be the US$30 showing on your P&L). I can set the MYR amount to anything at all and nothing changes on my P&L.
2) My bank balances are not showing up correctly anymore after posting the end of year journal. As I understand it, posting a journal should not affect the actual amount in the bank account (i.e. per my bank statement) but instead only its base currency equivalent (i.e. its valuation on the balance sheet). Unfortunately this is not the case and it's affecting the bank balance as well e.g. My base currency is USD. I have an MYR bank account. I post a journal between the MYR bank account and the realised currency losses account for USD486.37. Looking on the Account Transactions report I can see this transaction has an MYR equivalent of MYR2,010.21, which is the same amount that my bank balance is now out by. With this in mind I see no way to correct the balance of foreign currency accounts which is what the last post by Paul is about.
This is causing me some major headaches - could someone please advise if there are known issues with what Paul has posted or if I'm the only one experiencing these problems? What else could I be doing wrong?
Hey @Ben_H! In terms of the amount that you adjust the MYR account (and it not recording the unrealized gains/losses on forex) sounds like it may be a bug. If it's okay with you, it would be beneficial if you sent me a DM with your business name and email address so that I can give myself collaborative access to your account to further investigate what could be going on here.
As for the second part of your inquiry -- Your foreign currency account balance is moving with the Journal entry. It shouldn’t. This is a known issue on the list for the accounting team to fix. (The base currency accounting will still be right, but very inconvenient for your experience).
@JamieD - just sent you the requested information with some more background in a DM
@JamieD I am experiencing the same issue as Ben_H. I tried following the steps that PaulC provided, but I see that in my foreign currency account, I have successfully reduced the base currency total to where it should be, but the foreign currency total has also been reduced and is now incorrect.
My home currency is HKD, foreign currency is CAD. In my CAD account, I have an extra HK$4,334.73 that I need to get rid of as a foreign currency loss, without touching the CAD balance (which is already correct). So, following Paul's instructions, I created a journal entry:
This reduced the home currency to where it should be, but it also automatically reduced the CAD balance. Now the CAD balance is incorrect. It should remain $1,190.50, but it got reduced when I made the journal entry.
I can't see how to fix this - super frustrating because PaulC's instructions seem like exactly what I need to do, yet apparently don't work. @JamieD, any advice?
Hi! I have some stock in a company based in the UK (I'm in the US), and I'm trying to work out how to properly account for the foreign currency. Maybe I'm doing it wrong, but I'm pretty sure the currency feature has some gnarly bugs.
In the example below I created two transactions: one to buy the asset and the other to sell. Both the asset account I'm showing and the bank account I transfer funds to and from are set to GBP currency.
As you can see, it correctly shows that my account balance is now 0 GBP, but shows a USD balance of $1,472.24! [amount varies depending on dates of transactions]
I've tried switching the transactions from expense to income types and I've also tried just entering a journal transactions directly, but that is even worse: it does not appear journal transactions support foreign currencies at all; all amounts are treated as USD regardless of the account.
Hey @charlesjolley ! I've moved your post into this discussion because it seems to be closely related to the process that others are using. While Wave can support some foreign currency actions, we recommend that you show the conversion in either a Gain or Losses account. This will ensure that your overall bookkeeping is correct, when looking at the big picture. I'd encourage you to take a look at @PaulC 's post above as he walks you through the process step by step. It's a little bit of a read, but should help to clarify the process.
Hey @JordanFromWave, I have the same issue as @charlesjolley. The foreign currency accounts are showing crazy numbers. In the transaction dropdown numbers are okey, but when I see reports there are mess.
@charlesjolley @vladimir -- I reached out to a member of our Wave+ team to see if they could provide us a bit more information here:
-Based on the screenshot, you bought the asset for EUR 25K, and sold it for EUR 25K: this means there was no gain or loss.
-The problem has to do with cumulative differences in exchange rates that Wave is using vs what happened in the real world.
-The value of the “Other long-term asset” is at EUR 0 in Wave, but because of the cumulative differences in exchange rates, Wave thinks that the “other long-term asset” is still sitting at a value of USD $1472.24.
-The important thing to remember here is that there was no gain or loss: the asset was purchased for EUR 25K, and sold for EUR 25K. This means that the $1472.24 is not a gain or loss, it’s the result of the cumulative differences in exchange rates — not entirely a bug, but more so a difficulty inherent to foreign currency accounting software.
-To sort things out, you can do the following, but will still want to check with your accountant:
1) Go to the Chart of Accounts page, and under the “Retained Earnings: Profit” section, add an account called “Cumulative Translation Adjustments”.
2) Add a journal transaction where they CR “other long-term asset” $1472.24, and DR “Cumulative Translation Adjustments” $1472.24.
3) Go the Chart of Accounts page, and Archive the “Other Long-term Asset” account.
-After doing this the Balance Sheet will be correct.
-If you chose to add this entry, you should include notes on the journal indicating “This journal entry was recorded to account for cumulative differences in exchange rates”, and anything else you can think of that clarifies things for you and your accountant in the future.
@Ben_H @scottb did you guys manage to fix the issue? I'm having the same problem