finance, accountingA small business from Australia received the payable invoice from supplier located in USA on USD 20.000. How would that reflect on company’s books and how we would register it in accounting system? What are the main elements that would be our obligation?
Absolutely talk to an accountant who is familiar with international accounting.
Also, disclaimer: the details of generally accepted accounting principles in your country might be different to what follows; I’m only familiar with continental European accounting practices. (Insofar as I’m aware of, they’re similar to those in North America and I presume other developed nations, but don’t take my word for it.)
Basically, you need to be consistent within your own accounting, both within the same year, and year to year unless you’re able to justify the change. In a nutshell, you’ve two ways to deal with it:
Use that day’s currency conversion rate to convert the invoice in your local currency, and use that value for accounting purposes, and then book some financial gain/loss when you actually pay or receive your payment if applicable.
Hold completely separate accounts in the foreign currency, and at the accounting year’s end convert the totals as one off aggregate lines in your local currency: inflows, outflows, balance sheet movements, and financial gain/loss as needed to reflect year on year fluctuations in the currency rates at the reporting date.
You can combine both approaches if you’re dealing with many different currencies. For instance, if your business activity is high in the EU and the US, you might have EUR and USD accounting at the side of your AUD accounting, and consolidate the former two into your AUD accounts when closing the year, all while converting transactions you get in rarer currencies directly in AUD at their daily exchange rate.
That said, and again, this is based on (continental) European experience. So talk to an accountant, because they’ll actually know for sure for your own country, and they’ll be able to best guide you on how to manage this. Prefer an accountant with experience in this if you’ve lots of international business, else they’ll invariably default to the first of the above mentioned scenarios - which may or may not be the most sensible one for you.
Also worth noting is that some countries allow you to do and report your accounting in a non-local currency. In Hungary for instance, companies can readily file their accounts and tax returns in USD or EUR rather than HUF.
If the Aussie company is not using multi-currency aware accounts system and it is a one-off invoice only, the invoice could be posted in AUD equivalent on the day of entry. Otherwise use Denis’s answer.
Any difference on payment date is posted to a Gain/(Loss) on Foreign Exchange Income account.
Westpac tells me it will cost $26,741.54 AUD to buy $20K USD right now. Enter the invoice in your accounting system as $26,741.54 AUD and in the notes write $20,000USD
When the company pays the invoice in 7-30 days (or longer) it will cost less (or more) to buy the USD. If the AUD increased in value e.g. a saving of $200 AUD. Enter your payment and zero the invoice by creating an Income Account called Gain/(Loss) on Foreign Exchange and allocating the $200 AUD savings to it. If the AUD decreased in value and it costs e.g. $200 more to buy $20K USD enter -$200 AUD in the Gain/(Loss) account.
A Simpler Way
Add a discount/(extra charge) on the invoice when you pay it to reflect the Gain/(Loss).
For completeness then make a journal entry between Discounts Received account and the Gain/(Loss) on Foreign Exchange so that the Income Statement is accurate.
I paid plenty of invoices to European countries in Euros and to China and the US in dollars. I used an online currency conversion site, vastly cheaper than a bank. In our accounts it showed up as the GBP cost as that was what was shown leaving the bank account.
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