Multi-Currency Transaction Scenarios

The following are Payment Scenarios using an Exchange Rate and the Accounting Methods behind each transaction.

The Calculation Method for the Scenarios 1-6 = Multiply(Scenario 7 is the Example of the Calculation Method being Divide)

Scenario1: Full Payment

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Invoice Date: 7/1/2008 --- Exchange Rate: 2.00 --- Invoice Amount: £15.00
  • Payment Date: 8/1/2008 --- Exchange Rate: 1.80 --- Payment Amount: £15.00
General Ledger Entries on 7/1/2008
G/L Account Debit Credit
Accounts Receivable $30.00 -
Revenue Account - $30.00
G/L Account Debit Credit
Cash Account $27.00 -
Realized Loss $3.00 -
Accounts Receivable - $30.00

The Payment Calculations are based on the following formulas:

  1. Cash Account = (Payment Amount in the Transaction Currency) X (Exchange Rate at the Time of Payment)
    2. [£15.00 x 1.80] (This is the Value of the Cash Received in the Home Currency. See Multi-Currency Definitions.)
  2. Realized Gain/Loss = (Payment Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of Payment and the Original Transaction/Invoice)
    3. [£15.00 x (1.80 - 2.00)] (This is a Realized Loss Because the Amount is Negative)
  3. Accounts Receivable = (Payment Amount in the Transaction Currency) X (The Exchange Rate at the Time of Payment and the Original Transaction/Invoice)
    4. [£15.00 x 2.00]

Scenario 2: Partial Payment

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Invoice Date: 7/1/2008 --- Exchange Rate: 2.00 --- Invoice Amount: £15.00
  • Payment Date: 8/1/2008 --- Exchange Rate: 1.80 --- Payment Amount: £12.00
General Ledger Entries on 7/1/2008
G/L Account Debit Credit
Accounts Receivable $30.00 -
Revenue Account - $30.00
G/L Account Debit Credit
Cash Account $21.60 -
Realized Loss $2.40 -
Accounts Receivable - $24.00

The Payment Calculations are based on the following formulas:

  1. Cash Account = (Payment Amount in the Transaction Currency) X (Exchange Rate at the Time of Payment)
    2. [£12.00 x 1.80] (This is the Value of the Cash Received in the Home Currency. See Multi-Currency Definitions.)
  2. Realized Gain/Loss = (Payment Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of Payment and the Original Transaction/Invoice)
    3. [£12.00 x (1.80 - 2.00)] (This is a Realized Loss because the amount is negative)
  3. Accounts Receivable = (Payment Amount in the Transaction Currency) X (The Exchange Rate at the Time of Payment and the Original Transaction/Invoice)
    4. [£12.00 x 2.00]

Scenario 3 : Credits

Only a credit in the Transaction Currency can be applied to an open invoice. The open credit in the following example was generated and applied to a customer's account on a specific date but applied to the invoice on a later date.

Credit Adjustment

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Credit Date: 7/15/2008 --- Exchange Rate: 2.00 --- Credit Amount: £15.00
  • Conversion Date: 8/1/2008 --- Exchange Rate: 1.80
General Ledger Entries on 7/15/2008
G/L Account Debit Credit
Cash/Return Account $30.00 -
Liability Account - $30.00

An Adjustment will take place

General Ledger Entries on 8/1/2008
G/L Account Debit Credit
Liability Account $30.00 -
Cash/Return Account - $27.00
Realized Gain/Loss - $3.00

And a New Credit will Be added

G/L Account Debit Credit
Cash/Return Account $27.00 -
Liability Account - $27.00

The Credit Calculations are based on the following formulas:

  1. Liability Account = (Credit Amount in the Transaction Currency) X (Exchange Rate at the Time of the Original Transaction)
    2. [£15.00 x 2.00] (This is the Amount of the Credit in the Home Currency. See Multi-Currency Definitions.)
  2. Cash/Return Account = (Credit Amount in the Transaction Currency) X (Exchange Rate at the Time of Conversion)
    3. [£15.00 x 1.80]
  3. Realized Gain/Loss = (Credit Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of the Original Transaction and the Time the Conversion)
    4. [£15.00 x (2.00 - 1.80)] (This is a Realized Gain because the amount is Positive)

Applying a Credit to an Invoice

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Credit Date: 6/15/2008 --- Exchange Rate: 2.00 --- Credit Amount: £15.00
  • Invoice Date: 7/1/2008 --- Exchange Rate: 1.80 --- Invoice Amount: £50.00 (Note: The credit is applied to the invoice on this date)
  • Payment Date: 8/1/2008 --- Exchange Rate: 1.90 --- Payment Amount: £15.00
General Ledger Entries on 6/15/2008
G/L Account Debit Credit
Cash/Return Account $30.00 -
Liability Account - $30.00
G/L Account Debit Credit
Liability Account $30.00 -
Accounts Receivable - $27.00
Realized Gain - $3.00

The Credit Calculations are based on the following formulas:

  1. Liability Account = (Credit Amount in the Transaction Currency) X (Exchange Rate at the Time of the Credit/Liability was created)
    2. [£15.00 x 2.00] (This is the Amount of the Credit in the Home Currency. See Multi-Currency Definitions.)
  2. Accounts Receivable = (Credit Invoice Amount in the Transaction Currency) X (Exchange Rate at the Time of Invoice)
    3. [£15.00 x 1.80]
  3. Realized Gain/Loss = (Credit Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of the Original Credit and the Time the Credit was Applied)
    4. [£15.00 x (2.00 - 1.80)] (This is a Realized Gain because the amount is Positive)
General Ledger Entries on 8/1/2008
G/L Account Debit Credit
Cash Account $66.50 -
Accounts Receivable - $63.00
Realized Gain - $3.50

The Payment Calculations are based on the following formulas:

  1. Cash Account = (Payment Amount in the Transaction Currency) X (Exchange Rate at the Time of Payment)
    2. [£35.00 x 1.90] (This is the Value of the Cash Received in the Home Currency. See Multi-Currency Definitions.)
  2. Accounts Receivable = (Payment in the Transaction Currency) X (Exchange Rate at the Time of Original Transaction/Invoice)
    3. [£35.00 x 1.80]
  3. Realized Gain/Loss = (Payment Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of Payment and the Time of the Original Transaction/Invoice)
    4. [£35.00 x (1.90 - 1.80)] (This is a Realized Gain Because the Amount is Positive)

Scenario 4: Refunds/Returns

Note: The primary difference between a RETURN and a REFUND is that a refund will have a Gain/Loss.

BASIC ASSUMPTION for both Scenarios: Refund was done at the same time the invoice was canceled either by a credit card (Auto Refund check box selected) or by a check on the same date.

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Invoice Date: 7/15/2008 --- Exchange Rate: 2.00 --- Invoice Amount: £15.00
  • Payment Date: 8/15/2008 --- Exchange Rate: 1.80
  • Invoice Cancellation Date: 8/31/2008 --- Exchange Rate: 2.10
General Ledger Entries on 7/15/2008
G/L Account Debit Credit
Cash/Return Account $30.00 -
Liability Account - $30.00
G/L Account Debit Credit
Cash Account $27.00 -
Realized Gain/Loss $3.00 -
Accounts Receivable - $30.00

The Invoice and Payment Calculations are based on the following formulas:

  1. Cash Account = (Invoice Amount in the Transaction Currency) X (Exchange Rate at the Time of Payment)
    2. [£15.00 x 1.80] (This is the Amount of the Payment in the Home Currency. See Multi-Currency Definitions)
  2. Accounts Receivable = (Invoice Amount in the Transaction Currency) X (Exchange Rate at the Time of Invoice)
    3. [£15.00 x 2.00]
  3. Realized Gain/Loss = (Invoice Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of the Payment and the Time of Invoice)
    4. [£15.00 x (1.80 - 2.00)] (This is a Realized Loss because the amount is Negative)
General Ledger Entries on 8/15/2008
G/L Account Debit Credit
Return Account $30.00 -
Realized Gain/Loss 1.50 -
Cash Account - $31.50

The Refund Calculations are based on the following formulas:

  1. Return Account = (Original Payment Amount in the Transaction Currency) X (Exchange Rate at the Time of the Original Payment Amount)
    2. [£15.00 x 2.0] (This is the Value of the Refund in the Home Currency. See Multi-Currency Definitions.)
  2. Realized Gain/Loss = (Payment Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of the Original Payment and the Time of the Refund)
  3. Cash Account = (Refund to be Made in the Transaction Currency) X (Exchange Rate at the Time of the Refund)
    4. [£15.00 x 2.10]
    [£15.00 x (2.00 - 2.10)] (This is a Realized Loss Because the Amount is Negative)

Refund After a Partial Payment

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Invoice Date: 7/15/2008 --- Exchange Rate: 2.00 --- Invoice Amount: £15.00
  • Payment Date: 8/15/2008 --- Exchange Rate: 1.80 --- Payment Amount: £5.00
  • Invoice Cancellation Date: 8/31/2008 --- Exchange Rate: 2.10
General Ledger Entries on 7/15/2008
G/L Account Debit Credit
Cash/Return Account $30.00 -
Liability Account - $30.00
G/L Account Debit Credit
Cash Account $9.00 -
Realized Gain/Loss $1.00 -
Accounts Receivable - $10.00

The Invoice and Payment Calculations are based on the following formulas:

  1. Cash Account = (Payment Amount in the Transaction Currency) X (Exchange Rate at the Time of Payment)
    2. [£5.00 x 1.80] (This is the Amount of the Payment in the Home Currency. See Multi-Currency Definitions.)
  2. Realized Gain/Loss = (Payment Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of the Payment and the Time of Invoice)
    3. [£5.00 x (1.80 - 2.00)] (This is a Realized Loss because the amount is Negative)
  3. Accounts Receivable = (Invoice Amount in the Transaction Currency) X (Exchange Rate at the Time of Invoice)
    4. [£5.00 x 2.00]
General Ledger Entries on 8/15/2008
G/L Account Debit Credit
Return Account $30.00 -
Realized Gain/Loss $.50 -
Accounts Receivable - $20.00
Cash Account - $10.50

The Refund Calculations are based on the following formulas:

  1. Return Account = (Original Invoice Amount in the Transaction Currency) X (Exchange Rate at the Time of the Original Transaction/Invoice)
    2. [£15.00 x 2.0] (This is the Value of the Refund in the Home Currency.See Multi-Currency Definitions.)
  2. Realized Gain/Loss = (Refund to be Made in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of the Original Transaction and the Time of the Return)
    3. [£5.00 x (2.00 - 2.10)]This is a Realized Loss Because the Amount is Negative)
  3. Accounts Receivable = ([Original Transaction Amount in the Transaction Currency - Payment Received in the Transaction Currency]) X (Exchange Rate at the Time of the Original Transaction/Invoice)
    [(£15.00 - £5.00) x (2.00)]
  4. Cash Account = (Refund to be Made in the Transaction Currency) X (Exchange Rate at the Time of the Refund)
    5. [£5.00 x 2.10]

Scenario 5 : Write-Offs

All write-offs are created in the Transaction Currency only. When a write-off is in a currency other than the Main Currency, the exchange rate at the time of the Transaction will be used therefore no Realized Gain/Loss will be recognized.

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Invoice Date: 8/15/2008 --- Exchange Rate: 2.00 --- Invoice Amount: £15.00
  • Write-Off Date: 9/30/2008 --- Exchange Rate: 1.80 --- Write-Off Amount: £3.00
General Ledger Entries on 8/15/2008
G/L Account Debit Credit
Accounts Receivable $30.00 -
Revenue Account - $30.00
G/L Account Debit Credit
Bad Debt Account $6.00 -
Accounts Receivable - $6.00

The Write-Off Calculations are based on the following formulas:

  1. Bad Debt Account = (Write-Off Amount in the Transaction Currency) X (Exchange Rate at the Time of Invoice)
    2. [£3.00 x 2.00] (This is the Amount of the Write-Off in the Home Currency. See Multi-Currency Definitions.)
  2. Accounts Receivable = (Write-Off Amount in the Transaction Currency) X (Exchange Rate at the Time of the Original Transaction)
    3. [£3.00 x 2.00]

Note: Since the Write-Off is in the Transaction Currency only, the fact the the exchange rate at the time of the journal entry was 1.80 is irrelevant.

Scenario 6 : Rounding Errors

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Invoice Date: 7/15/2008 --- Exchange Rate: 2.00 --- Invoice Amount: £15.00
  • Payment Date: 8/15/2008 --- Exchange Rate: 1.825
General Ledger Entries on 7/15/2008
G/L Account Debit Credit
Cash/Return Account $30.00 -
Liability Account - $30.00
G/L Account Debit Credit
Cash Account $27.38 -
Realized Gain/Loss $2.63 -
Accounts Receivable - $30.00
Rounding Error - $.01

The Invoice and Payment Calculations are based on the following formulas:

  1. Cash Account = (Payment Amount in the Transaction Currency) X (Exchange Rate at the Time of Payment)
    2. [£15.00 x 1.825] (This is the Amount of the Payment in the Home Currency. SSee Multi-Currency Definitions.)
  2. Realized Gain/Loss = (Payment Amount in the Transaction Currency) X (The Difference in the Exchange Rate at the Time of the Payment (settlement) and the Time of the Original Transaction/Invoice)
    3. [£5.00 x (1.825 - 2.00)] (This is a Realized Loss because the amount is Negative)
  3. Accounts Receivable = (Payment Amount in the Transaction Currency) X (Exchange Rate at the Time of Invoice)
    4. [£5.00 x 2.00]
  4. Rounding Error = (Total Credits) - (Total Debits)
    5. [($30.00) - ($27.38 + $2.63) = $.01

    If this is a Positive Number the rounding error is a Debit. If this is a Negative Number the rounding error is a Credit.

Scenario 7 : Divide Calculation Method

  • Main Currency: US Dollars ($)
  • Transaction Currency: Pounds (£)
  • Invoice Date: 7/15/2008 --- Exchange Rate: 0.50 --- Invoice Amount: £15.00
  • Payment Date: 8/15/2008 --- Exchange Rate: 0.52 --- Payment Amount: £15.00
General Ledger Entries on 7/1/2008
G/L Account Debit Credit
Accounts Receivable $30.00 -
Revenue Account - $30.00

These Journal Entries are based on the following formula: (Payment Amount in the Transaction Currency) X (1/Exchange Rate at the Time of the Original Transaction/Invoice)

[£15.00 x 1/0.50]
General Ledger Entries on 8/1/2008
G/L Account Debit Credit
Cash Account $28.85 -
Realized Loss $1.15 -
Accounts Receivable - $30.00

The Payment Calculations are based on the following formulas:

  1. Cash Account = (Payment Amount in the Transaction Currency) X (1/Exchange Rate at the Time of Payment)
    2. [£15.00 x 1/.052] (This is the Value of the Cash Received in the Home Currency. SSee Multi-Currency Definitions.)
  2. Realized Gain/Loss = (Payment Amount in the Transaction Currency) X (The Difference between 1/the Exchange Rate at the Time of Payment and 1/the Exchange Rate at the Time of the Original Transaction)
    3. [£15.00 x (1/0.52 - 1/0.5)] (This is a Realized Loss Because the Amount is Negative)
  3. Accounts Receivable = (Payment Amount in the Transaction Currency) X (1/Exchange Rate at the Time of Payment and the Original Transaction/Invoice)
    4. [£15.00 x 1/0.50]