Multi-currency bookkeeping is needed as soon as you invoice customers, pay suppliers or hold bank accounts in more than one currency. Every foreign transaction has to be recorded in its own currency and translated into your home currency, and the difference between the rate on the invoice date and the rate on the payment date has to go somewhere.
Key takeaways
- Record each foreign transaction in its original currency, with the exchange rate on the transaction date.
- Exchange differences on payment are realized gains or losses.
- Open foreign balances at month end may need revaluation, which creates unrealized gains or losses.
- Reconcile foreign bank accounts in their own currency first.
- Use one consistent source for exchange rates, set up in your accounting software.
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What is multi-currency bookkeeping?
It is recording transactions in more than one currency while reporting in a single home currency. Most accounting systems, including QuickBooks Online, Xero and NetSuite, support it once the feature is turned on. The bookkeeper's job is to make sure rates, revaluations and reconciliations are handled consistently.
How foreign transactions are recorded
- Invoice or bill. Recorded in the foreign currency, translated at the rate on that date.
- Payment. Recorded at the rate on the payment date.
- Realized gain or loss. The difference between the two translated amounts is posted to an exchange gain or loss account.
- Month-end revaluation. Open foreign invoices, bills and bank balances are retranslated at the month-end rate, if your accounting policy and software call for it, with the difference posted as unrealized.
Reconciling foreign accounts
Reconcile each foreign bank account in its own currency against the bank statement. Then check that the home currency balance reflects the correct month-end rate. Payment platforms holding several currencies need the same treatment, which matters for sellers covered in our post on outsourced bookkeeping for ecommerce.
Ask us to check your exchange gain and loss accounts
Common problems
- Foreign payments recorded in home currency only, so customer and vendor balances never clear.
- Bank fees on international transfers missing from the books.
- Exchange gains and losses posted to sales or expense accounts.
- Rates entered by hand, inconsistently, across transactions.
Groups with subsidiaries in several countries also face translation and intercompany issues, covered in our post on NetSuite intercompany elimination. For general bank account routines, see monthly bank reconciliation. Our bookkeeping service covers multi-currency clients.
A worked example
Suppose your home currency is US dollars and you invoice a UK customer £1,000 when the rate is 1.25. The invoice is recorded as £1,000 and $1,250. When the customer pays, the rate has moved to 1.27, so the £1,000 received is worth $1,270. The $20 difference is a realized exchange gain.
If the invoice were still unpaid at month end and the month-end rate were 1.23, revaluation would restate the receivable at $1,230. The $20 drop is an unrealized loss, which may reverse the next month or when the invoice is paid.
The same logic applies to bills from foreign suppliers and to balances in foreign bank accounts.
Setting up your system for multiple currencies
Before recording foreign transactions, turn on multi-currency in your accounting software, choose your home currency carefully, because it usually can't be changed later, and decide where exchange rates come from. Set up customers, vendors and bank accounts in the currency you actually deal with them in. Then agree with your accountant whether month-end revaluation is part of the close and which accounts it covers.
Frequently asked questions
What is the difference between realized and unrealized exchange gains?
A realized gain or loss happens when a foreign invoice or bill is paid at a different rate from when it was recorded. An unrealized gain or loss comes from revaluing balances that are still open at month end.
Which exchange rate should I use?
Use one consistent source, usually the rates built into your accounting software or a published source your accountant agrees. Ask your tax adviser whether specific rates are required for tax.
Do I need a separate bank account for each currency?
Not always, but holding major currencies in their own accounts can reduce conversion costs and makes reconciliation easier.
Where should bank fees on international transfers go?
Record them to a bank charges expense account when they are deducted. If they are left out, the customer or vendor balance won't clear and the difference sits in the books unexplained.
Get multi-currency support from Oakridge Global
Our bookkeepers work with businesses that buy and sell across borders. Schedule a consultation with Oakridge Global to talk about your currencies.