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Foreign currency is often involved when dealing with overseas clients or suppliers. However, managing the currency translation could be complex.
A local currency bank account is simply an account denominated in your home currency. For example, your account would be in Singapore dollars if you reside in Singapore.
Of course, you may use a local currency bank account to pay and receive funds from overseas suppliers and clients. However, if you have many foreign currency transactions, opening a multicurrency bank account and turning on the multicurrency feature in your accounting software would make managing your account easier.
Assuming your supplier billed you in US dollars for:
100 pcs of Product 01 at US$13.80 each, gross: US$1,380.00
100 pcs of Product 02 at US$15.50 each, gross: US$1,550.00
Invoice total: US$2,930.00
Suppose you did not turn on the multiple currency feature. In that case, you'll need to convert the foreign currency amounts into your local currency, such as Singapore dollars, before entering them into your accounting software. For instance, the currency translation is 1 Singapore dollar to 0.7463 US dollars.
Your entry in Singapore dollars could be:
100 pcs of Product 01 at S$18.49 each, gross: S$1,849.00
100 pcs of Product 02 at S$20.77 each, gross: S$2,077.00
Invoice total: S$3,926.00
As the original bill stated, you instructed the bank to transfer US$2,930.00 to your supplier, and the bank deducted S$4,024.73 from your local bank account. Compare the bank's deduction to the purchase invoice you entered in your accounting software; you have a difference of S$98.73 (4,024.73 - 3,926.00) due to exchange translation.
Let's return to your MoneyWorks accounting software. You had entered the purchase invoice for S$3,926.00 (equivalent to US$2,930.00).
Option 1: Make payment from the local bank ledger.
Make a payment to the supplier invoice of S$3,926.00. The payment cleared the outstanding payable.
Record another payment, a dummy transaction from your local bank. The payee could be the supplier or bank name, and the exchange expense account should be for S$98.73.
This method gives you a total payment from the local bank ledger of S$4,024.73, the amount transferred from the bank. However, you must remember to select the two separate transactions when reconciling the bank.
Option 2: Use a Clearing account for multiple currencies transaction.
Use the fund transfer from the MoneyWorks command menu to transfer S$4,024.73 from the local bank to a clearing bank account.
Then, pay with the clearing bank account for the outstanding purchase invoice of S$3,926.00.
You enter another dummy payment to clear the balance of S$98.73 from the clearing bank to the exchange expense.
It would be easier to reconcile the local bank with option two as it does not separate the transaction into two.
Either method works if you have only a few traceable foreign currency transactions. However, managing your foreign currency with the multiple currencies feature turned on would be easier.
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