If your business issues invoices or makes purchases in a foreign currency, Wave will automatically keep track of how these values convert to your business currency to keep your bookkeeping accurate.
Wave uses the accrual method of accounting, which means that income and expenses are recognized at the time they are incurred; not when money changes hands. This could happen because you suffer a bad debt or because you invoiced in a foreign currency, and the value of that currency relative to your business currency changed between when you created your invoice and when you received payment, or when you got a bill and when you pay it.
Let’s say, you signed a contract with Maple Tours, to write a travel guide to the USA for visitors from Canada. You agreed to a fixed fee in Canadian dollars (CAD).
Creating your Invoice:
You completed the work by the end of February, and on March 1st, you invoice your client the agreed fee of $10,000 CAD. Your base accounting currency is US Dollars (USD), which are worth more than Canadian dollar on this day. When you use Wave Invoices, Wave will calculate the exchange rate approximation for you automatically. You can choose the currency of an invoice by using the currency drop-down menu next to the Total amount on the Invoice.
This approximation is called the Unrealized Gain or Loss. When you anticipate that you’ll be exchanging a foreign currency at a future date, like receiving payment for an invoice, Wave keeps track of the fluctuation in the exchange rates for you.
When you approve the invoice, it’s bookkept to reflect the expected currency conversion rate on the date that the invoice was raised. If you look at your balance sheet, you’ll see an entry in the Unrealized Gain or Loss on foreign exchange account depending on whether the current conversion rate of the currency is more or less favorable than the day that you raised the invoice.
Maple Tours turned out to be a good client, and sent you a bank payment within the agreed upon 30 day due date. When your bank deposited their payment to your account, the Canadian dollar had strengthened against the US Dollar.
In any case where you're receiving a payment from a client in another currency, you'll need to complete the payment deposit at your bank so you know how much currency is actually exchanged.
When you're ready to record a payment on the invoice, select the account, and make sure to record the effective rate at which the currency has been exchanged to ensure the payment reflects what you receive at the bank.
You'll always need to record foreign currency payments directly on the invoice. Foreign currency invoices can't be paid from the Transactions page. If the bank has imported these transactions, record the transaction on the invoice, and then go back and delete the bank import from the Transactions page.
In the case of this invoice, the value of the Canadian dollar fluctuated during the time between when you sent the invoice to Maple Tours, and the the time that you actually exchanged currency. You expected to do ~$7,600.00 USD in work, which is what you recorded on the invoice; but when it was all said and done, you got paid and the total converted to $7,356.29. The difference is automatically recorded as a loss on foreign exchange expense by Wave.
Creating a Bill:
You ordered new business cards from a vendor you met while you were doing research on your trip to Canada to write the guide for Maple Tours.
Your business cards arrived in the mail, and included the invoice for $150 CAD. Enter the Bill in Wave by going to Purchases>Bills. Make sure that you input the amount that the vendor charged, in the vendor's currency. Wave calculates the approximate value of the payment you owe to the vendor in your business currency.
This approximation is called an Unrealized Gain or Loss. When you anticipate that you’ll be exchanging a foreign currency at a future date, like paying a bill, Wave keeps track of the fluctuation in the exchange rates for you.
Paying the Bill:
You don't need to manage cashflow right now, and would rather pay the bill while the exchange rate is relatively favorable so you pay the bill a week later.
Make sure to complete the transaction before recording the payment. You need to make sure you complete the real-world exchange of currency before you record it in Wave.
Record the Bill payment by using the drop-down menu on the Bills list view. Select the method, account, and ensure that you enter the rate that you actually achieved at the bank. You can calculate this by dividing the amount on your bank statement by the amount your vendor charged in their currency.
The difference between the approximate value of the bill on the day that you received it, and the day that you paid it is the realized gain or loss on foreign exchange. When you use Wave Bills, we take care of this calculation for you.