Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
- Warren Buffett
One of the more perplexing things we hear from our customers has to do with foreign exchange.
Basically, when you have bank accounts in Canadian dollars as well as in a foreign currency, the system has to be told what the exchange rate is for that currency, at the time the transaction was entered.
There are two ways of accommodating exchange rates. The first is to enter the exchange rate between Canadian and the foreign currency on every transaction. The second is to pretend that Canadian and the other currency are at par for the year, then do one large adjusting entry at year end to report the exchange rate difference.
Either method is acceptable; the first gives a more immediate snapshot of your account status, but the second method is faster to use on a day-to-day basis.
Invariably, there may be times that the numbers just don’t add up. As I write this, the Canadian dollar is worth about $0.75 US. Therefore, if I had a US dollar account with $750.00 in it, it should also show a balance of $1000.00 Canadian.
Sometimes, though, this doesn’t happen. Here’s an extreme scenario: in our prior example, let’s say that half of our US dollars, $375 US, was entered when the Canadian dollar was worth $.50 US. That $375 US is therefore worth $750 Canadian.
The other $375 US was entered when the Canadian dollar was at par. That $375 US was worth $375 Canadian.
Adding up the two US dollar entries, we get $750 US. Adding up the two Canadian amounts, we get $1125 Canadian. If our dollars were really at par now, this would be a nuisance.
Next; imagine if, now that our dollars are still at par, we remove $750 Canadian from the account. Now we have a balance of $0 US, but which equals $375 Canadian!
Some years ago, we created a tool to help fix this issue. Browse to Sage article number 10623, and follow the steps.
Briefly, what it helps you to do is this:
If the Canadian balance is right, we want the US balance to also be $375.
Change the exchange rate to $376 US = $1 Canadian (reason why shortly) and add $1 to the Canadian side of the account. This will give us a new balance of $376US, and $376 Canadian.
Now, change the exchange rate back to 1:1, and take a dollar out of each account. Our new balance is $375 in each account. That’s why we added the extra dollar at the start.
If the US side is accurate, then we would want both sides to be zero. Same thing only backwards.
Change the exchange rate to $1 US = $376 Canadian. Take $1 US AWAY from the account. You will now have a balance of -$1 on both sides. Again, change the exchange rate back to 1:1 then add a dollar to the account. Both sides are now at zero. Problem solved.
Fun accounting trivia: Money was not always in the form of a plastic credit card, nor even in paper bills.
The first recorded ‘money’ was bowls of barley, in Mesopotamia. It could be stored, carried, eaten, and made into beer. As a currency, it had a fairly delineated exchange rate, agreed on by most of society.
After barley, of course gold, silver, copper and iron became valued. One of the more interesting forms of currency is sea shells. In many Polynesian societies, cowry shells were used as units of currency well into the 1800’s. In modern-day Vanuatu, the trend away from hard cash and toward electronic payment has reversed somewhat. Many locals now accept conch shells and pigs as payment.
In Papua New Guinea, the official currency is the Kina, a regular paper banknote. However, locals can still go to the bank and trade shells on a string for Kina at an approved exchange rate.