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October 14, 2012 6:25 PM   Subscribe

Accounting puzzle: how to log cash transactions for accounts held in a foreign currency?

This started out as an experiment, but has now turned into an intriguing puzzle. (At least for me.) I am not an accountant, as you will soon see.

Background - told in story format, if that annoys you, feel free to skip to the good part:

So, I did another trip for work to Japan. For fun, I decided to track all my expenses and compensation as if the trip were a business, using double-entry accounting, but by hand with a spreadsheet. I made myself a General Journal, in which I logged every transaction I made for the whole two weeks, and a General Ledger to post the transactions to.

The money I had on me on the first day, I debited to cash, and credited to capital. When I spent money, I credited cash and debited an appropriate expense account. If it was a reimbursable expense, I also credited an income account and debited Accounts Receivable to simulate charging my employer for that expense.

So far, so good, and a very interesting experience. But here's the complication: foreign currency. I initially did what this guy advised, and it worked beautifully. But of course I'm not satisfied with that, because that's not the GAAP-compliant way to do it, from what I can tell browsing the web.

So what I ended up doing, switching halfway through, was keeping a 'Cash USD' account and a 'Cash JPY' account separately, but Cash JPY was accounted for in US Dollars. (I called US Dollars my "functional currency" since that's what I report expenses in, get reimbursed in, and also still use US currency a lot on the military base.) There was another "shadow" account for Cash JPY recorded in yen, so I could keep track of the "real" balance, independent of exchange rate. Every transaction meant I first had to adjust the USD balance of Cash JPY to what it should be at the current exchange rate from the JPY balance, then record the actual transaction (both in USD and in JPY). That was a bit more annoying, but that ALSO worked.

The problem with that method is, my General Journal sure is cluttered up with multiple entries for every little thing like buying a cup of coffee. So I tried to implement a subsidary Cash Payments Journal. And that's where the confusion starts with exchange rates. It seems no matter how I set up the Cash Payments Journal for JPY, I end up with the whole system not balancing after I post to the General Ledger. Something about accumulating several transactions at different exchange rates (GAAP says you're supposed to use the spot rate in effect at the time of the transaction, ideally) screws the whole thing up. Even if I try to individually calculate the exchange gain for each transaction vs. the rate at posting time, then add them all up and post the sum, it doesn't balance.

How is this supposed to be done? What I can find with search engines is either too simplified (only addresses using the General Journal) or too technical (talking about hedging, multinational subsidary companies, etc.) or well, just the FAS (which tells me what to do, but not HOW.)

This is just a curiosity for me; there's no money on it. My compensation all worked out more than adequately, just the way it always does. but I actually find it REALLY interesting to see how this all would work.
posted by ctmf to Work & Money (3 answers total)
 
I'm not familiar with most of what you're talking about; I apologize if this is not helpful or if it is egregiously wrong.

If I was paying for things in cash JPY, I would use the exchange rate of at the time I actually withdrew the JPY from the bank - because that would be the exchange raid that was really used. I would not use the exchange rate at the time of the transaction, because that would be irrelevant, and would prevent things from balancing out correctly.

So, if I took out 10,000 JPY in cash from an ATM, and $120 USD was debited from my account, I would use that exchange rate for all purchases made with the cash 10K JPY. When I withdrew more cash, I would use the exchange rate for the new withdrawal.

I hope this makes sense!
posted by insectosaurus at 11:39 PM on October 14, 2012 [1 favorite]


If I was paying for things in cash JPY, I would use the exchange rate of at the time I actually withdrew the JPY from the bank - because that would be the exchange raid that was really used. I would not use the exchange rate at the time of the transaction, because that would be irrelevant, and would prevent things from balancing out correctly.

Yes, I think this is the way to do it. Think of multi-currency accounting as tracking inventory. Even though modern markets make it seem this way, currencies aren't fungible. You are buying things with other things.

I think the GAAP issues you are seeing aren't relevant in your simple expense account example. They would only become relevant if you were an ongoing operation that never closed out the account, and needed to do things like quarterly reports showing the current value of your Yen account in USD. You would have to use the current exchange rate to make that report, regardless of what those Yen cost you, because those kinds of reports are about the current value.

It's the difference between cash accounts and depreciation-type accounts. I think.
posted by gjc at 8:04 AM on October 15, 2012


Yeah, that's the common-sense thing to do, but the problem is this: GAAP seem to want the expense recorded when I spend the money to be recorded at the current rate right then, not the rate in effect when I withdrew the money. That results in a gain or loss due to the difference in rates between the two times.

That's easy to keep track of if I only withdraw money once, then spend it all and repeat. It's very hard to keep track of if I withdraw, say, 10,000 yen at rate X, spend 5000 at rate y, withdraw 10000 more at rate z, spend 12000, etc.
posted by ctmf at 5:37 PM on October 15, 2012


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