Maybe you're thinking of expanding your ecommerce shop to customers in other countries. Or maybe you just inked a deal with a great new foreign supplier. Congrats! Taking your business international is heady stuff and a big step in your growth.
Less fun: dealing with the books once foreign currencies are involved. In this guide, we'll walk you through the basics.
Dealing with foreign currencies makes your accounting a bit more complicated. It also opens you up to certain risks: if an exchange rate spikes or drops unexpectedly, you might find yourself with less money than you'd expected.
So why not just back away from the entire situation?
First off, most people prefer to pay in their own currency. Accepting different currencies can help you attract new customers from other countries.
Second, some suppliers only accept their local currency or charge a fee for conversion. For a long-term relationship, it might make sense to pay them using the currency they prefer.
When dealing with customers/vendors in other countries, you need to decide on the best way to get money from A to B—and state those terms clearly in any contracts or online policies. This is a good moment to consider what you can do to keep transfer fees low and manage the risks of fluctuating exchange rates.
How will the money actually get from your customers to you, or from you to your suppliers? You have a few options:
You'll also want to get crystal clear on the timing of any big transactions.
It's always nice to know when you'll have money coming in, but it's even more important when invoices are in foreign currencies. Why? Exchange rates fluctuate, and the value of your invoice could change dramatically in a matter of weeks.
Getting paid faster helps lower the risk that the invoice will suddenly be worth a lot less, or you'll suddenly be paying a lot more. Every once in a while it may work out in your favour, but for accurate planning purposes, the shorter the time between delivery and payment, the better.
Once your international operation is up and running, it's time to think about how to deal with foreign currencies in your financial books.
Official accounting standards like IFRS and GAAP have rules about how to do this. Though some of the details may vary, two key principles remain the same:
Exchange rates change all the time. You'll need to know which rate to use when you're translating amounts into your home currency—otherwise your totals may be hundreds or even thousands of dollars off the mark.
The rules:
An example will help show how these principles might play out in real life.
Let's say you own a US-based company selling marble sculptures. A German hotelier buys a bust of Beethoven for 2,500 euros. That day, the euro is trading at 1.2 US dollars.
To translate 2,500 euros into US dollars, you do the following calculation:
2,500 x 1.2 = 3,000
So you would record the transaction as 3,000 US dollars in your records. Here's how that would look:
It's also a good idea to add a note that the original price was 2,500 euros, so you can refer back if necessary.
So far so good.
Now let's say that the hotelier pays you two weeks later. The exchange rate has changed over the past 14 days; now the euro is now worth 1.3 USD. To translate the payment, you calculate:
2,500 x 1.3 = 3,250
The payment is worth 3,250 US dollars. Thanks to exchange rate fluctuations, you just made an additional $250 (nice!). Here's how you'd record this gain:
When you sit down to prepare your financial statements at the end of a period, use the exchange rate on your balance sheet to translate any assets and liabilities listed in a foreign currency.
That includes accounts payable and accounts receivable. If the exchange rate has changed between the transaction date and the balance sheet date, you'll post the changes as income (if it's a gain) or an expense (if it's a loss).
A reminder: when you're calculating foreign exchange gains or losses, it's important to double-check that they are the result of a change in the value of the currency—and not discrepancies or fees that should be caught when you're doing bank reconciliations.
Foreign currency accounting can be finicky. When you start to expand into other countries, it's a good time to assess whether you want to get help with your books.
A bookkeeping service (like Bench), an experienced accountant, or a tax professional can guide you through the nitty-gritty details. They can also offer advice on how your international operations affect your tax situation—and they may even be able to find a few ways to lower your foreign exchange risk.
We are offering free 1 Month Basic Bookkeeping to all new customers so you can experience Accracy's seemless and professional services.
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