You worked hard to pursue a prospect in Canada, Quadra Systems. Finally, after tough negotiations, you have landed the contract. This is a great start and you can feel it in your gut that there is huge potential for you with this client, if you execute well. The contract is designated in Canadian Dollars (CAD) and so you need to gear up to invoice in CAD and receive payment in CAD.
- 1. Create a new income account with the name Sales (CAD). In the Security/currency field, click on Select and the Select Currency dialog will open. Select CAD (Canadian Dollar) from the Currency drop-down.
- 2. Create a new Accounts Receivable (CAD) account. Select the Security/currency as CAD and the Account Type as A/Receivable.
- 3. You need a holding account to show the payment received in CAD, until it is converted to USD. Create a new bank account named Holding Account (CAD) under Current Assets. Select the Security/currency as CAD and the Account Type as Bank, as shown in the next screenshot. You should create this GnuCash account, regardless of whether or not you have a bank account designated in CAD.
- 4. Remember your contract is in CAD not in USD. Create an invoice for CAD 9,950. Select the newly created Income:Sales (CAD) account as the Income Account, as shown in the following screenshot:
- 5. Click Post. Make sure the Post to account is your newly created Accounts Receivable (CAD) account.
- 6. Go to your Accounts Receivable (CAD) account and make sure that it shows an amount of CAD 9,950.00 receivable from Quadra Systems.
- 7. Now you have received the payment. Go to Business | Customer | Process Payment. Select the Customer and Invoice and enter the CAD received in the Amount field. Select Accounts Receivable (CAD) in the Post To field, and select Holding Account (CAD) in the Transfer Account field, as shown in the following screenshot:
- 8. Open your Holding Account (CAD) and make sure that it shows a balance of CAD 9,950.00.
- 9. Next, you have to manually transfer this amount from this holding account to your USD bank account and apply the exchange rate that your bank gave you on the day of conversion. With the cursor on the transaction in the Holding Account (CAD), select from the menu Actions | Transfer. (Note: The cursor position is very important for this step.). The Transfer Funds window will open. Enter the Amount and Description in the Basic Information pane. The Holding Account (CAD) will be selected as the Transfer From account already. Select your Checking Account as the Transfer To account. As soon as you do that, the Currency Transfer pane below will be enabled. You know the exact amount in USD that your bank credited to your account. So, check the To Amount radio button and enter that amount. GnuCash will calculate and show the Exchange Rate for your ready reference, as shown in the following
- 10. Click OK to make the transfer.
- 11. You will also have to manually apply any fees charged by your bank. There are two ways of doing this. You can either apply this as a split in the transfer transaction you did previously or you can create a separate transaction for this, whichever is convenient.
Even though your client paid in CAD, you suddenly found that a USD credit showed up in your bank account. This way of recording an implied transaction using the Holding Account (CAD) makes sure there is clarity in exactly what happened here. Even though there is no real Holding Account (CAD) at the bank, it is true that the amount came in as CAD from your customer to your bank and your bank sold the CAD and bought USD to credit your account, and your bank charged you a fee for providing this service. All of that is well represented in this method of accounting.
Let us say you travelled to Europe on business. You are presented with a hotel bill in Euros. You pay it with your credit card. Until the transaction hits your card account, you won't know what exchange rate the card company applied. Waiting until that happens is not a good option either. How will you enter that transaction in USD? Here is one way of doing it in GnuCash:
- Check the going exchange rate and calculate the USD equivalent.
- Create an entry in your credit card account for this amount and add **PROVISIONAL** at the end of the transaction description.
- Optionally, you can also add the EUR value of the hotel bill in the description.
- Once the transaction hits your statement, you can go back and correct the transaction that you created earlier with the actual USD amount. At the same time, you can remove the **PROVISIONAL** from the description.
This way, you are creating a timely entry and also making sure the correct value ends up in your books.
Here is a list of frequently asked questions about foreign currency transactions and our answers:
- Q: I have to post a transaction between a USD account and a foreign currency account. How do I enter the two different currency values or apply an exchange rate?
- A: One way of doing it is using the Transfer Funds window, as we showed in the previous tutorial. The other way is to right-click on the transaction and select Edit Exchange Rate. The Transfer Funds window will come up. However, this second method may not work in some cases. If that happens, you can use the first method as a fall back.
- Q: My contract is designated in USD and my foreign customer pays in equivalent EUR, based on the current exchange rate. However, when the amount is received by my bank and they apply the exchange rate, there is always a currency gain or loss. Where do I record this currency gain or loss?
- A: You need to manually add the currency gain or loss as a split to the transaction. You cannot do that from the Transfer Funds dialog.
- Q: How do the reports work when I have accounts in different currencies?
- A: Reports convert the amounts from accounts in other currencies into USD. In the Report Options dialog, in the Commodities tab, the Price Source defaults to Average Cost. However, you can change it to Weighted Average, Most recent, or Nearest in time. Nearest in time will use the conversion rate closest to the date of the report and Most recent will use the conversion rate closest to today.
- For a foreign currency transaction, which one of the following is not the right way to enter an exchange rate?
a. From the menu, select Actions | Edit Exchange Rate.
b. From the menu, select Actions | Enter Exchange Rate.
c. From the menu, select Actions | Transfer... to open the Transfer Funds dialog.
d. Right-click the transaction and select Edit Exchange Rate.