Revaluation at Year End
In
most countries, GAAP requires that you carry
your foreign currency
cash and claims on cash (receivables and payables)
at the current exchange rate at the end of every
period. For example, let's say your business is
located in the us, and the only foreign currency
transaction into which you entered during the year
was a sale to a Canadian customer in Canadian
dollars (and you have a Canadian dollar bank
account). The sale is for CDN$1,500, and the
customer has paid you. The exchange rate on that day
was 0.654. Your bank account would be stated in your
books as
CDN $
bank $1,500.00
Exchange
on CDN $ bank (518.97)
The
sum of these two cash accounts represents the us
dollar equivalent of that Canadian cash ($981.03).
At your year end, the exchange rate is now 0.672. Your Canadian cash is
now worth $1,008.00. We need to make an entry to
reflect the increase in value. The entry looks like
this:
DR Exchange on Cdn $
bank $26.97
CR Exchange
gain (income)
$26.97
The cash is now
valued at its year end value on the statements. You
would perform this same adjustment to the foreign
currency receivables and payables.
Reconciling the
Foreign Currency Bank Account
The
reconciliation process for foreign currency bank
accounts is really not that different from the
process for domestic accounts. The only difference
is that you will reconcile the account in the
foreign currency.
For
example, if you are a Canadian company with a pounds
sterling bank account, the bank statement will show
in pounds sterling. You will have an account in your
ledger called "Pounds sterling bank" or something
similar. Only pounds will be in this account. All of
the exchange amounts to value it in Canadian dollars
will be in another cash account called "Exchange on
pounds sterling account" or something similar. You
do not need to reconcile this account, because you
will be adjusting it to actual at the end of every
period.
Reconciling and
Revaluation Foreign Currency Bank Account
