Multi-currency accounting

Imagine issuing a Singapore dollar sales invoice to a local customer, receiving an order in euros from a European customer, issuing a purchase order to a US supplier in US dollars, and entering a supplier bill in CNY (Chinese Yuan Renminbi). Congratulations! You are now part of a global marketplace.

Exchange fluctuation is the biggest hurdle when translating from one currency to another, and it is vital to businesses trading with foreign currency, as it could affect the bottom line.

Suppose you purchased US$20,000 worth of goods from an overseas supplier at an exchange rate of S$1 to US$0.7634, which translates to a Singapore dollar equivalent of S$26,198.59.

A few weeks later, you purchased another US$20,000 worth of the same goods from the same supplier, but at an exchange rate of S$1 to US$0.7246. Now, the translation to the Singapore dollar is S$27,601.44. The exchange rate fell from 0.7634 to 0.7246, meaning you must pay more in Singapore dollars to acquire the same US$20,000 worth of goods. Unwittingly, the weakening of the Singapore dollar reduced your margin by S$1,402.85 (S$27,601.44 - S$26,198.59). Should you increase or maintain the selling price? Do you need to switch the selling currency from one to another that is more advantageous for you? — A decision you have to make.

Multi-currency accounting involves buying and selling goods in a currency (such as USD or CNY) that differs from your reporting currency (e.g., SGD). The exchange rate on the day you issue an invoice may differ from when you receive payment, which creates a discrepancy—foreign exchange gains or losses.

There are two types of exchange gains or losses: realised and unrealised.

Realised gains or losses differ between the value recorded on the transaction date and the value on the settlement date. Unrealised gains or losses, on the other hand, are potential gains or losses of the foreign currency balances that occur at the end of the accounting period.

Once you record the payment for an invoice, MoneyWorks auto-calculates the exchange gains and losses and posts them to the appropriate ledger. There isn't much you need to do other than maintain the exchange rate in the accounting software.

Assuming your transactional exchange rate for the Singapore dollar to the US dollar in January was 0.7634, and by the end of January, the rate changed to 0.7246.

Select the currencies feature from the show menu of the MoneyWorks accounting software. Highlight the currency you wish to edit, such as the US dollar, and click the set rate button on the icon bar. Change the date to 31 January, the last day of the month, and ensure the period shows January. The old exchange rate will display 07634. Enter 0.7246 into the new rate field and save it. The accounting software calculates the exchange difference and posts an exchange journal to update the outstanding balances in the foreign currency accounts, including accounts receivable, accounts payable, and bank accounts.

Set Exchange Rate

Assuming you use the closing rate from the previous month as the current month's transaction exchange rate. In this case, February follows the closing of January. If you have not done so, open a new period (February) from the command menu and set the exchange rate for 1 February to 0.7246.

Let's recount the steps to update the exchange rate in MoneyWorks:

• Post all transactions related to foreign currency.

• Backup if necessary.

• Change the closing exchange rate (last day of the month).

• Open a new period.

• Set the transactional exchange rate for the new period (first day of the month).

Fluctuating exchange rates make currency conversion a complex process. However, mastering key concepts and utilising the right technology can simplify it.