When you check the balance, both in foreign currency and home currency, of your foreign currency bank account, you will notice the home currency is not correct. This is due to the fluctuation of the foreign currency exchange rates. Sage 50 does not maintain updated exchange rate to automatically calculate home currency balance for foreign currency bank account. This fluctuation creates a gain or a loss for your company, and you have to adjust your bank account balance to recognize this gain or loss periodically. This adjustment can be accomplished by 2 general journal entries.

In today’s article, we use Canadian dollars (CAD) as the home currency and US dollars (USD) as the foreign currency. We assume the followings:

• CAD balance is incorrect
• CAD balance is $500.00
• USD balance is $1000.00
• Correct CAD balance is $1100.00

Based on the above assumptions, our current CAD balance is too low.

 In order to rectify the issue and get the correct home currency balance (CAD) back, you will have to follow the procedures below:

1. Find the difference between the correct balance and the current balance in CAD. In our example, it is $1100.00 - $500.00, which is $600.00.
2. Open general journal, select USD in the Currency drop down box, so USD bank account can be selected.
3. Make the 1^st adjustment entry. Since the current CAD balance is too low, we will debit the USD account by $1 and credit the exchange and rounding account by $1. For your information, if the CAD balance is too high, we will do the opposite by crediting the USD account by $1 and debiting the exchange and rounding account by $1.
4. Put the difference calculated from Step 1 (600) plus 1, which is 601, to the Exchange Rate box.
5. Post the entry. It will debit $1.00 USD, which is equivalent to $601.00 CAD, to the USD account and credit the same amount to the exchange and rounding account. By looking at the USD bank account now, it will have a CAD balance of $1101.00 and USD balance of $1001.00.
6. Make the 2^nd adjustment entry to remove the extra $1.00 dollar in both currencies created by Step 5. Credit USD account and debit the exchange and rounding account by $1.00 using the exchange rate of 1.
7. The USD account will now have a CAD balance of $1100.00 and USD balance of $1000.00.

A friendly reminder is that if you post a large amount to the exchange and rounding account after adjustment, it may distort the income statement for the year. If this is the case, you will need to consult your accountant for adjusting this amount to prior years.

I will do one more example next week. Stay tuned for the next blog post and happy Wednesday afternoon.