Friday, March 19, 2010

Multiple Currencies in accounting systems

Almost all accounting systems support multiple currencies.

There are some key concepts about multiple currency support:

1. Revaluation
  • The purpose is to ensure the account balance held in foreign currencies are represented with an accurate value in the base currency for financial reporting. This is required by GAAP.
  • The amount needs to be adjusted because of the currency fluctuation.
  • Revalue the account balance for balance sheet accounts (Asset and Liability), not the individual transactions.
  • Currency revaluation typically happens in the period end, which is also considered as the reporting date.
  • The exchange rate to be used is the spot at the end of period although sometime the accounting rule does allow the use of the average rate.
  • Revaluation Gain or Lost adjusting entries should be posted to the base currency.
  • The account balance amount will be adjusted by the adjusting entries.
2. Translation
  • The purpose of translation is to translate the amount available from one base currency to the other base currency.
  • Translation is typically part of the consolidation process.
  • The account balances from the base currency of a company is 'translated' to the base currency of the parent company.
  • The currency exchange rate to be used are the spot rates at the translation date (period-end date) for asset and liability balances and are the average rates for revenue and expense balances
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