Working of Inter Currency Conversion

Motivation for Intercurrency Conversion Account

-- NEOSYS SUPPORT --: NEOSYS, behind the scenes mostly, keeps a complete double entry trial balance and set of accounts for each currency independently.

there is an interesting concept that should perhaps illustrate something to you

you know how double entry book keeping stops accountants from making mistakes

by ensuring that if they do make a mistake than they make TWO mistakes

eg fail to enter correct income amount .. then the client account is also wrong

-- CLIENT --: yes

-- NEOSYS SUPPORT --: double entry accounting works by implementing a CONTROL

control means checking versus something else

In NEOSYS the same trick is done with currency

NEOSYS keeps TWO sets of double entry books

one in pure currency per currency

and one in pure base currency per currency

complete two sets of books for the whole company

in parallel

many financial software systems do not keep separately balancing double entry accounts per currency and lack this secondary control that is present in NEOSYS

in order to do this NEOSYS ensures that in every journal voucher, not only the base currency amount balances but so does every currency on the transaction balance to zero

-- CLIENT --: thats in the current system

ok

-- NEOSYS SUPPORT --: this is any company using NEOSYS and trading in currency

well the currency books can be checked versus the client/supplier/bank etc

then NEOSYS revaluation checks that the base books agree with the currency balances AT THE LATEST RATES

and and discrepancy is chucked into the GAIN AND LOSSES account somewhere in the P&L where it causes a lot pain if wrong because it hits profit/loss

-- CLIENT --: aha. ok

-- NEOSYS SUPPORT --: initially there are a lot of queries about NEOSYS generating exchange gains and losses

but in the end NEOSYS has always proved to be correct

in some companies which are not sophisticated currency-wise, the currency books and the base currency books are never really compared

this allows their finance team to DEAL ONE WAY WITH THEIR CLIENTS IN ANOTHER WAY WHEN REPORTING TO THEIR MANAGEMENT

client/suppliers/banks only care about currency

boss/management only care about base currency since they want ONE set of reports eg balance sheet and profit and loss that represents the whole picture of all currencies

accountants must be schizophrenic.

on one hand they have to deal with real currency with their clients/suppliers/banks ... and the base equivalent is IRRELEVENT to operations

and on the other hand they have to prepare reports to management/shareholders in pure base currency ,,, and the currency amount is IRRELEVENT to management/sholders

NEOSYS facilitates this necessary schizophrenic view but at the same time meticulously ensures that the two alternative views are reconcilable

-- CLIENT --: i get the concept

-- NEOSYS SUPPORT --: many accounting systems are only double entry in the base currency books

ie if you add up all the foreign currency from all the accounts .. it doesnt balance

in many financial systems, currency is just a comment except on accounts like client/supplier/banks

in NEOSYS we make sure that each and every currency is also balanced to zero using double entry accounting

this why if you debit one currency and credit another currency then you see NEOSYS adding two extra lines to REVERSE the currency amounts ... either into exchange gains and losses if the base amounts are not the same ... or to the special NEOSYS account called "Inter-currency Conversion"

four line voucher where you expected to see only two lines that you entered

imagine this ...

you can ask for NEOSYS financial reports for any single currency that you like and it will focus solely on transactions and balances for that currency you chose

ignoring all the other currency transactionsx

so not only does NEOSYS keep complete parallel double entry books for currency and base separately

it also keeps a separate set of books for each currency"

by default, NEOSYS presents all currencies to you as a consolidated position so you think you have one set of books

if you transact in 10 currencies ... NEOSYS keeps 20 separate books of accounts

each currency has a balancing set of books in currency amount and its base amount

-- CLIENT --: yes. 10 in the base and 10 in the foreign currency

same set

ok

-- NEOSYS SUPPORT --: so NEOSYS DOESNT MIX CURRENCIES AT ALL DEEP DOWN

as you would expec, NEOSYS will prepare financial reports for all currencies consolidated

that is the default reporting option but it isnt a fixed part of the system

in a NEOSYS client whose base currency is AED, in settings you can select USD only and option: UNCONVERTED

then you will see a SLICE of the company which is purely USD transactions

and the two sides of that slice are the USD amount and the base equivalent of those USD transactions alone.

-- CLIENT --: ok.

i noticed this while investigating ledger printouts in multi-currency

-- CLIENT --: when you send statements to clients from NEOSYS it will print the currency slices separately without any base currency showing

clients a) don't case about your base currency and b) expect to see a separate statement for each currency that they deal in with you EVEN IF YOU PUT ALL CURRENCIES INTO A SINGLE NEOSYS ACCOUNT

a common error that accountants new to NEOSYS make is to assume that you must open separate accounts for each currency that a client or supplier deals in

a true multi-currency accounting system like NEOSYS allows mixed currencies in one account number but automatically gives multiple statements for each currency that is discovered in the account at the time of preparing the statement

this ISOLATION of currencies from each other is the reason why you CANNOT ALLOCATE ONE CURRENCY TO ANOTHER DIRECTLY in NEOSYS

you cannot use USD receipt to pay off AED invoices directly

however you can happily post one currency into the bank and a different currency into the client in a single transaction

Intercurrency conversion WITHOUT gain/loss - Intercurrency Conversion Account

-- CLIENT --: ok. so while posting receipt we have to calculate the equivalent for the client and enter it and the actual amount to the bank.

-- NEOSYS SUPPORT --: Yes. NEOSYS doesnt insist that you balance the currencies in a single voucher since it will happily reverse everything into the exchange gains and losses or inter currency conversion a/c

-- NEOSYS SUPPORT --: bank a/c +1000USD (+3670base) client a/c -3670AED (-3670base) .... and NEOSYS adds two more voucher lines Intercurrency conversion account -1000USD (-3670) and Intercurrency conversion account +3670AED (+3670base)

1. bank a/c +1000USD (+3670base)

2. client a/c -3670AED (-3670base)

and NEOSYS adds

3. Intercurrency conversion account -1000USD (-3670)

4. Intercurrency conversion account +3670AED (+3670base)

q1. what is the total amount of USD posted

q2. what is the total amount of AED posted

q3. what is the total amount of base currency posted to the intercurrency account (ie its balance after the above transaction assuming it was 0 to start with)

-- CLIENT --: the client account should be -1000USD (-3670base) . right?

-- NEOSYS SUPPORT --: no, The client account is credited in this example with -3670AED (-3670base)

in the above transaction we have decided to do a currency conversion for the client in order to pay off some AED invoices

presumably the clients account has some AED invoices to pay off

this is a receipt so we are increasing our bank balance by 1000USD and decreasing the amount the client owes us by 3670AED

we decide or agree with the client how much AED to give to the client in return for their payment of USD

we are acting as a currency exchange broker for the client

in the example given, we are converting the clients USD to AED at our standard accounting rate therefore there are no exchange gains and losses

This does not have to be the case though. We could have a agreement that USD receipts will be used to pay off AED invoices at some other rate

DR +bank

CR -client

-- CLIENT --: right, but doesnt he client a/c also have to be in USD?

-- NEOSYS SUPPORT --: no need and remember we already debited the client with some AED invoices in AED.

The USD is certainly information available on the receipt voucher but the entry on the clients account is formally AED.

-- CLIENT --: ok. got it.. sorry. you cannot use USD receipt to pay off AED invoices

-- NEOSYS SUPPORT --: you COULD do a two step process if you really want the USD to show as an entry in the client account but three entries would show in the end as follows:

ie credit the clients account with 1000USD as a first step

and then CONVERT the USD to AED in the clients account like this

1. client a/c +1000USD (+3670base)

2. client a/c -3670AED (-3670base)

this is a currency conversion transaction on the clients a/c

crediting and debiting the same a/c

no change in the base currency on the second stage (assuming we are not charging him an exchange commission)

but all this doesnt answer the questions I posed initially

-- CLIENT --: q1. what is the total amount of USD posted - 1000 USD to the Bank and 1000 USD to the Intercurrency conversion account

-- NEOSYS SUPPORT --: total means TOTAL .. not a list

single figure

-- CLIENT --: its only 1000 USD which gets posted

-- NEOSYS SUPPORT --:

1. bank a/c +1000USD (+3670base)

2. client a/c -3670AED (-3670base)

3. Intercurrency conversion account -1000USD (-3670)

4. Intercurrency conversion account +3670AED (+3670base)

what is the total USD posted

arithmetic total

-- CLIENT --: 2000USD

-- NEOSYS SUPPORT --: those DR/CR mean something, the + and - are a clue

-- CLIENT --: zero?

-- NEOSYS SUPPORT --: yes

what is DR1000 and CR1000 or in other words +1000 + -1000?

-- CLIENT --: 0

-- NEOSYS SUPPORT --: 0

double entry booking keeping

q2 and 3 should be easier now you understand that by total we mean simple arithmetic totals

-- CLIENT --: q2. what is the total amount of AED posted - 0 again

-- NEOSYS SUPPORT --: yes

double entry bookkeeping

-- CLIENT --: q3. what is the total amount of base currency posted to the intercurrency account - 3670

-- NEOSYS SUPPORT --: nope

1. bank a/c +1000USD (+3670base)

2. client a/c -3670AED (-3670base)

3. Intercurrency conversion account -1000USD (-3670base)

4. Intercurrency conversion account +3670AED (+3670base)

-- CLIENT --: 0

-- NEOSYS SUPPORT --: yes

how do you feel about those answers

-- CLIENT --: the intercurrency conversion account is used as the contra account for the first 2 entries

-- NEOSYS SUPPORT --: q1. what is the total amount of USD posted .. answer zero

doesnt that feel strange to you?

sure the answers are arithmetically clear .. but if they dont feel strange then you missed the point

how is it possible to receive 1000USD yet the total posted into the books is zero ...

yet if you received 1000USD and put 1000USD against the clients account you would happily accept that according to double entry booking keeping that the total posted would be zero

-- CLIENT --: thats the principle of double entry accounting right?

oh. ok

-- NEOSYS SUPPORT --: basically intercurrency accounting in NEOSYS is turned into single currency accounting using an account called the "intercurrency conversion" account if the base amounts agree

or "exchange gains and losses" if the base amounts do not agree

we have to invent something called ICC (get it?) in order to reduce all multicurrency transactions to combinations of single currency transactions

-- CLIENT --: ok.

-- NEOSYS SUPPORT --: what seems like a complexity in the voucher turns out to have radically simplifying effect on the books

ie every currency will balance independently and can be viewed as standing alone from all other currencies

-- CLIENT --: ok

in case you had to directly post the USD to the client as well?

-- NEOSYS SUPPORT --: i gave the answer in detail already ...

-- CLIENT --:

1. bank a/c +1000USD (+3670base)

2. client a/c -1000USD (-3670base)

-- NEOSYS SUPPORT --: this can easily happen if you dont know what invoices the 1000USD is for ... so you dump it into the account as an unallocated credit to be sorted out later

-- CLIENT --: right. and do the journal to convert it to AED

-- NEOSYS SUPPORT --: all that happens thereafter is that you do the ORIGINAL voucher ... but the first line is the client a/c instead of the bank a/c

look back at the original transaction and subsitute mechanically and ponder the result

you can think that the client is your banker by the time of this second voucher

-- CLIENT --: you mean debit the client?

-- NEOSYS SUPPORT --: first voucher you debit (+) the bank

second voucher you debit (+) the client in the first line

look back at the original transaction and subsitute mechanically the bank for the client and ponder the result

-- CLIENT --: why would you debit the client if you receive the payment?

this is the next voucher after payment received?

-- NEOSYS SUPPORT --: yes

in case you credit client with 1000USD and LATER decide to use it to pay off AED invoices

LATER means another voucher to

a) convert the currency in the account - remove 1000USD and give them 3670AED

b) presumably to allocate all in one go

-- CLIENT --:

1. client a/c +1000USD (+3670base)

2. client a/c -3670AED (-3670base)

3. Intercurrency conversion account -1000USD (-3670base)

4. Intercurrency conversion account +3670AED (+3670base)

-- NEOSYS SUPPORT --: right

-- CLIENT --: perfect

-- NEOSYS SUPPORT --: exactly

the ICC lines appear to confuse unless you keep a clear mind that in base they have NO effect and are just there to ensure that each currency individually balances to zero all the time

-- CLIENT --: ok

Intercurrency conversion WITH gain/loss - Exchange Gain/Loss Account

-- NEOSYS SUPPORT --: if you are fairly clear on this I can tell you the more usual case where the base DOESNT agree exactly due to bank charges etc

-- CLIENT --: yes. i have began to understand this more

-- NEOSYS SUPPORT --: we would like to post this ...

1. bank a/c +1000USD (+3670base)

2. client a/c -3700AED (-3700base)

NEOSYS will add this:

3. GainLossA/c -1000USD (+3670base)

4. GainLossA/c +3700AED (+3700base)

all NEOSYS does is notes that the total base was not exacly zero therefore is doesnt want to do the old method of reversing into the Intercurrency Conversion A/c because the rule is that the ICC a/c base amount must always be zero (and not show in the financial reports which are base currency)

and it reverses them into a different a/c ... the famous Exchange Gains and Loss A/c

to grasp the significance of this you have to ask yourself the same three questions as before ...

which are:

q1. what is the total amount of USD posted

q2. what is the total amount of AED posted

q3. what is the total amount of base currency posted to the EXGA (ie its balance after the above transaction assuming it was 0 to start with)

-- CLIENT --:

3. GainLossA/c -1000USD (-3670base)

4. GainLossA/c +3700AED (+3700base)

right?

-- NEOSYS SUPPORT --: yes sorry

-- CLIENT --: q1 - 0

q2 - 0

-- NEOSYS SUPPORT --: yes ... cannot be anything else according to double entry rules

but the answer to q3 is very interesting

-- CLIENT --: q3 - 30 AED ?

-- NEOSYS SUPPORT --: read the question exactly

-- CLIENT --: yes. i have

-- NEOSYS SUPPORT --: the answer is 30base

-- CLIENT --: yes. i said 30

sorry. i didnt say 30base

-- NEOSYS SUPPORT --: you said 30 AED

-- CLIENT --: and presumed the base was AED

ok

-- NEOSYS SUPPORT --: you must never confuse the two

there is REAL AED and there is base that happens to be AED

the total AED posted to EXGA is 3700

the total base posted to EXGA is 30

so the answer is completely different

-- CLIENT --: ok

-- NEOSYS SUPPORT --: when we are talking about base we never mention its "sex"

we can say either 30 base or 30 "equalent in AED"

but never 30 AED because that sounds like we are talking about real chinkable AED coins

anyway the answer is as you say, 30 base

-- CLIENT --: ok

-- NEOSYS SUPPORT --: so in the case of multicurrency transactions where the base adds up to zero .. we get entries that have no effect on the consolidated base currency books

but in the case of multicurrency transactions where the base DOESNT quite add up to zero ... the NEOSYS "I DONT LIKE THIS SO I AM GOING TO REVERSE IT ALL" methodology neatly ends up with the DIFFERENCE showing in EXGA a/c although it is effected by TWO lines (+ and -) instead of a single 30base entru

the NEOSYS method of showing exchange gains and losses as a PAIR of entries in the EXGA a/c allow you to analyse the SOURCE of exchange gains and loss BY CURRENCY!

-- CLIENT --: ok

-- NEOSYS SUPPORT --: the one line exchange gain loss method a) hides the source currency of gain loss and b) means that currencies dont balance per currency

so NEOSYS method although apparently more complex has always eventually been proved an advance over the average accounting system which doesnt keep isolated slices of books for each currency

-- CLIENT --: ok.