How to record a transfer from a foreign currency bank account

If your business frequently makes sales or purchases in a different currency than your primary Business Currency, there's a good chance you have one or more Foreign Currency Bank Accounts.

Recording transfers between accounts in different currencies is a little tricky, as you need to ensure the exchange rates used line up correctly with the rate your bank actually gave you on the transfer, and also account for Currency Gains and Losses. But don't worry — by following the steps in this guide, you'll quickly be able to get on top of Foreign Currency Bank Transfers.

“It's a transfer, Jim, but not as we know it!”

Transferring funds from a foreign currency account is essentially the same as transferring funds between two accounts in your home currency, with one additional step.

So before we get into the detail, let's remind ourselves the normal way that you transfer funds between two accounts. Say, $100 from 'Checking' to 'Saving':

  1. Add (or locate, if you have the bank connected for auto updates) a $100 Expense transaction, paid from the sending account ('Checking Account', in this example).
  2. Add (or locate, if you have the bank connected for auto updates) a $100 Income transaction, paid into the receiving account ('Saving Account', in this example).
  3. Select the checkboxes next to the two transactions, and click the Transfer button at the top of the Transactions table. 

“How hard can it be?”

So, how is this different when the accounts are of different currencies? Not very, but there are two issues we need to deal with:

  1. Chances are, the exchange rate you get from your bank will be different to the daily mid-market rates that Wave uses by default. You're going to need to tell Wave the actual rate achieved; and
  2. We want transactions in your Foreign Currency account to be shown in the Foreign currency, and transactions in your Home Currency account to be shown in the home currency. To do this, we're going to need to make the transfer in two steps, via an Undeposited Funds account. Don't worry... we'll explain this in detail!

“OK. Let's do this!”

Let's take a scenario and go step-by-step:

Scenario:

Imagine you have a business located in the United States, and your base currency is US Dollars. You trade with enough Canadian companies that you keep a Canadian Dollar account also. You have CA$5,000 surplus in your Canadian account, and decide to transfer it to your US account. In your US Bank, you receive $3,702.09.

Here are the steps you'll need to take:

  1. If you don't already have one, create an ‘Undeposited Funds Account’. This is simply a bank account called ‘Undeposited Funds’ (or any other name you prefer, that says to you it is not a real, physical bank account). To create this:
    1. Click Accounting on the left navigation bar in Wave, then Chart of Accounts.
    2. Click the Add an Account button, then browse on the Asset tab into Bank => Bank & Cash => Other Bank Account.
    3. On the Edit account dialog that displays, overwrite ‘Other Bank Account’ with ‘Undeposited Funds’; make sure the ‘Payment Account’ checkbox is checked, and that your Home Currency is selected.
    4. Finally, click the Save button.
  2. Add (or locate, if you have the bank connected for auto updates) the US$3,702.09 Income transaction that represents the deposit into your US$ bank account (called 'Checking Account', in this example). 
  3. Add (or locate, if you have the bank connected for auto updates) the Expense transaction that represents the withdrawal from your CA$ bank account (called 'Checking Account (CAD)', in this example). Enter the amount of the expense in the Foreign Currency of the bank account, i.e. in CA$ for this example. 
  4. Create an Expense transaction from your ‘Undeposited Funds’ account for the Home Currency amount that you transferred to your Home Currency bank account. 
  5. Create an Income transaction into your ‘Undeposited Funds’ account for the Foreign Currency amount that you transferred from your Foreign Currency bank account, and adjust the exchange rate so that the ‘Home Currency’ amount matches the expected amount. 

    To record the Foreign Currency amount into your Home Currency ‘Undeposited Funds’ account, drop down the Details tab of the Transaction and set the Foreign Currency (CAD - Canadian dollar in this example). Insert the correct Exchange Rate, which will be simply the home currency amount received (US$3,702.09 in this example) divided by the foreign currency amount sent ($5,000 in this example). When you enter the correct rate, you will see the currency converted amount shown by Wave (in the red box, in the screenshot) matches the figure you expect.

    1. Transferring the Foreign Currency amount from your Foreign Currency Bank Account to your Undeposited Funds account (and converting it to Home currency); and
    2. Transferring the converted amount from your Undeposited Funds account to your Home Currency Bank Account. Finally, go ahead and complete the two Transfers.
  6. When the transfer is complete, you may see the exchange rate update to a rate generated by Wave's system, creating a disparity between the system's exchange rate and the one used by your bank. In this case, let's say the difference is $29.94. To balance the transfer, create a journal transaction. Debit your Undeposited Funds Account for $29.94 and credit your Realized Loss on Foreign Currency account for $29.94. This will ensure that your accounts are balanced and you're reporting on the difference.

If you don't see a Realized Loss on Foreign Currency account in the drop-down when you're creating the journal transaction, head over to Accounting > Chart of Accounts and add an Other Current Debt account, changing the name to Realized Loss on Foreign Currency.


Frequently Asked Questions

Help! I can't edit the Exchange Rate!

Wave displays an editable Exchange Rate field any time you are processing a transaction in a currency that is different to the currency of the Payment Account. If you cannot edit the Exchange Rate, that means that the currency you are recording the transaction in is the same as the account currency. In the example above, that would mean you were trying to record the transaction in US Dollars.

Do I really need to do two transfers? Why can't I just transfer directly between accounts, and adjust the exchange rate?

It is possible to transfer directly between accounts in different currencies, but remember that to adjust the exchange rate, you need to be recording a transaction that is in a different currency to the account currency. Going back to the example above, you could record a US$ withdrawal (expense) of US$3,702.09 from your Canadian Dollar account, and adjust the exchange rate to make this equal to CA$5,000. Your transfer would then work.

The problem this would cause is that you now have ‘Home’ (US$) and ‘Foreign’ (CA$) transactions in your Foreign Currency account, which would make balancing and reconciling the account very complicated. The method shown above “isolates” the currency switch in your ‘Undeposited Funds’ account, which should always come back to a zero balance after each set of transactions.

While I had money in my Foreign Currency Account, the exchange rate changed. How do I record the gain (or loss)?

Tracking currency gains and losses in foreign currency accounts is much easier when you use the method detailed above to record your transfers. There are a few steps to be aware of, so we have a whole separate article about this topic.

 

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