Last Wednesday, We went through an example of how to adjust a foreign currency bank account and to bring back the correct home currency balance. Today, we are going to do another example but the assumptions will be slightly different from the first one, which make things more interesting.
Here is the assumption for today’s example:
USD balance (not the CAD balance) is incorrect
CAD balance is $1100.00
USD balance is $1000.00
Correct USD balance is $900.00
Based on the assumptions written above, current USD balance is too high.
In order to bring back the correct USD balance, you will need to do the followings:
- Find the difference between the correct balance and the current balance in USD. In our example, it is $1000.00 USD - $900.00 USD, which is $100.00 USD.
- Open general journal, select USD in the Currency drop down box, so USD bank account can be selected.
- Make 1st adjustment entry. Since the current USD balance is too high, we will credit the USD account by the difference we obtain from Step 1 (100) plus 1, which is 101 and debit the exchange and rounding account by 101.
- For the exchange rate, we will get the rate by dividing 1 by the difference we obtain from Step 1 (100) plus 1, which is 101. The answer will be 0.0099001.
- Post the entry. It will credit $101.00 USD, which is equivalent to $1.00 CAD, to the USD account and debit the same amount to the exchange and rounding account. By looking at the USD bank account now, it will have a CAD balance of $1099.00 and USD balance of $899.00.
- Make the 2nd adjustment entry to add the $1.00 back to both currencies created by Step 5. Debit USD account and credit the exchange and rounding account by $1.00 using the exchange rate of 1.
- The USD account will now have a correct USD balance of $900.00 and the CAD balance remains as $1100.00.
Again, if the adjustment greatly affects the balance of the exchange and rounding account, which distorts the income statement, please consult with your accountant and adjust the amount to prior years.
This is the end of our 2nd part of rectifying currency issue with the foreign currency account. If you have any questions about adjustments we demonstrate from both last week and this week, please do not hesitate to post your feedback or question here, and we will do our very best to assist you.
See you next time.
