When you have accounts set up in foreign currencies, transactions and reports can become confusing. Here are some tips for managing your foreign currency accounts.
When you run a business in multiple currencies, things get complicated. We get it. One of the situations you may need to deal with in Wave is the effect on your account balances as exchange rates fluctuate. Here’s how it works, and what you can do.
How is the account balance on my reports calculated?
You might have noticed that the balance of a foreign currency account on your Balance Sheet doesn’t match what you expect to see if you translate the foreign balance using a current exchange rate. That’s because the business currency balance in Wave is the sum of each transaction, so as rates move up and down, the balance in your business currency moves too.
If you open the Account Transactions (General Ledger) report for a foreign currency account, you’ll see something like this:
Both currencies are visible on the report, and the balances are the running totals of the beginning balance plus or minus the individual transaction amounts. The exchange rate for each transaction depends on the source of the transaction, which unfortunately can lead to a growing difference between the account balance on Wave reports and the current translated value.
When you reconcile a foreign currency account in Accounting > Reconciliation, the balance and transactions are presented in the foreign currency. When you enter the ending balance, it must be entered in the foreign currency, not translated into the business currency.
How do I adjust the balance of my foreign currency accounts?
Entering a journal transaction to a foreign currency account in order to adjust the business currency balance will create an entry in the foreign currency as well. That means the foreign currency balance will be adjusted, and the account reconciliations will be affected; therefore we don't recommend this.
Instead, we offer the following options if you want to adjust the balance in Wave to equal the translated amount of the foreign currency balance, using a specific exchange rate:
If the foreign currency balance is zero, but the business currency has a balance
If this is the case, open Mave, Wave’s automated chatbot, and type revaluation entry. Mave will help collect any relevant details and direct you to the appropriate support. Learn how to open Mave in Get support with Wave. You’ll need to provide the name of the account, and the date you need the account revalued (the date when the balance should be zero).
If the foreign currency balance is not zero, and the business currency balance needs to be adjusted
We recommend using a "manual revaluation account" workflow. Here's how to do that.
- First, you'll need to create three new accounts. Head to Accounting > Chart of Accounts and click the Add a New Account button in the top right corner of the page.
For the first account, choose the same account type as the foreign currency account (in this example we’re revaluing a bank account, so it’s a Cash and Bank account). Keep your business currency selected (not the foreign currency!), and click Save.
Next, create an account in Income > Other Income, and name it "Unrealized gain on foreign exchange." Then create an account in Expenses > Operating Expenses, and name it "Unrealized loss on foreign exchange."
- Compare the current account value (perhaps according to your bank, or using a specific exchange rate) to the “historical” account value (this is the value on your Wave reports, including account transactions, trial balance, and balance sheet).
- Continuing with this example, let's say that the balance in this USD bank account is valued at CAD $421.11 on April 30. The difference between $421.11 and the current Wave balance, $179.69, is $241.42. This is the amount the revaluation account will need to be adjusted by, either with a journal transaction, or an income/expense transaction.
In this case, because the balance needs to increase, create an income transaction:
If the balance needs to decrease, create an expense transaction instead, and categorize it to "Unrealized loss on foreign exchange."
- Now, navigate to Reports > Balance Sheet. The sum of the foreign account balance plus the revaluation account balance will equal the accurately translated balance.
- Navigating to Reports > Profit & Loss, the unrealized gain or loss appears as well.
If you followed the manual revaluation steps above in the past, and now the foreign currency balance is zero
Open Mave, Wave’s automated chatbot, and type revaluation entry. Mave will help collect any relevant details and direct you to the appropriate support. Learn how to open Mave in Get support with Wave. You’ll need to provide the name of the account, and the date when the balance should be zero.
Mave can help you zero out the balance of the foreign currency account, but another important step you can take on your own is to recognize any realized gains or losses that you previously recorded as unrealized.
To accomplish this, navigate to Accounting > Chart of Accounts, and click Add a New Account in the upper right corner. Similarly to how you created the "Unrealized gain" (or loss) accounts earlier, now create "Realized gain" (or loss) accounts.
Finally, create a journal transaction to zero out the balance in the "Unrealized gain" (or loss) account. The other side of the entry will be the new "Realized gain" (or loss) account.
Foreign currency transactions are tricky - we recommend consulting your accountant or tax preparer for advice pertaining to your specific situation.