Sage Financials & multi-currency

Sage Financials & multi-currency

If you are like me and haven’t got an accounting qualification, you may find it difficult to understand how multi-currency works, and why it’s such a big deal. In the first in a series of articles explaining how multi-currency works I will go over the key problem of multi-currency and how this is resolved in Sage Financials.

(All the working here assume you are in the UK with GBP as your base currency)

Multi-currency and Realised Gains/Losses

A sales invoice raised for $10,000 has to be converted to GBP to be displayed in your PnL. This requires an exchange rate, and Sage Financials provides facilities to record exchange rates at different dates. By default Financials will take the last exchange rate on or before the invoice date, but you can override it with a custom rate when you enter the invoice.

Sage Financials then records the Foreign Currency amount ($10,000) the Exchange Rate (1.4) and the equivalent amount in GBP (£7,142.86) in the Ledger Item. And this is what is used for your Trial Balance, Balance Sheet, P&L etc.

The problem comes when you receive payment. Suppose your customer sends you $10,000 in Feb, but the exchange rate has changed to 1.35. That $10,000 is now worth £7,407.41 – you’ve made an extra £264.55 profit! Following accounting convention, this is posted to a ‘realized currency gains/losses’. And this is exactly how Sage Financials handles it. Here are the actual postings, but note that Sage Financials uses the ‘Exchange Rate Variance’ Ledger Account for realized gains/losses.

Raising the invoice

Sales Invoice 15th Jan (Exchange rate 1.40) Db Cr
1100 Debtors Control Account (AccountsReceivable_GB) BS $10,000 = £7,142.86
2200 Sales Tax Control Account (OutputVAT_GB) BS Zero
4000 Equipment Sales P&L $10,000 = £7,142.86
Dimension tags:
Sales Invoice Number $10,000 = £7,142.86
Customer $10,000 = £7,142.86
Analysis Dimensions (eg Product) £7,142.86


Receiving payment

Sales Receipt 21st Feb (Exchange rate 1.35) Db Cr
1100 Debtors Control Account (AccountsReceivable_GB) BS $10,000 = £7,407.41
1200 USD Bank Account (OutputVAT_GB) BS $10,000 = £7,407.41
1100 Debtors Control Account (AccountsReceivable_GB) BS £264.55
7906 Exchange Rate Variance P&L £264.55
Dimension tags:
Sales Invoice Number $10,000 = £7,407.41
Customer $10,000 = £7,407.41
Sales Invoice Number £264.55
Customer £264.55

The Posting rules compare the Base Balance of the Sales Invoice Number (£7,142.86) against the Foreign Balance x Exchange Rate ($10,000 @ 1.35 = £7,407.41) to calculate the Exchange Rate Variance (£264.55).
This means the Base and Foreign Balance on your Dimension Tags are critical to making the correct postings. If you have any doubts about the balances I would recommend running ‘Rebuild Balances’ before recording and Fx Payments or Receipts.

The result for the Trial Balance

Trial Balance at 21st Feb (Exchange rate 1.35)
1100 Debtors Control Account (AccountsReceivable_GB) BS Zero
1200 USD Bank Account (OutputVAT_GB) BS $10,000 = £7,407.41
4000 Equipment Sales P&L £7,142.86
7906 Exchange Rate Variance P&L £264.55
Dimension tags:
Sales Invoice Number $0 = £0
Customer $0 = £0
Analysis Dimensions (eg Product) £7,142.8

Note that the Customer and Sales Invoice Number Dimension Tags have been cleared to zero, indicating the invoice is paid and the customer no longer owes you. The analysis Dimension Tag retains the original GBP value.

Unrealized Gain/Losses

By Accounting Convention you ‘Realize’ a gain/loss when the transaction is completed: the Sales Invoice is paid or you pay a Purchase Invoice. In the example above, if you were preparing the accounts for Jan 31st, you have Debtors of £7,142.86. But if the exchange rate at 31st Jan is 1.35 rather than 1.40, that is a misleading figure. And if you trade substantially in foreign currency, this can make a significant difference to your reported profitability.

You can’t account for this by posting to ‘Exchange Rate Variance’ (realized gains/losses) as the gain/loss has not yet been realized. Instead you post to ‘Unrealized Gains/Losses’ using a currency adjustment.

‘Currency Adjustments’ is the topic for the next article, so please register for Sage Financialsknowhow to to make sure you receive it.

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