Working of Inter Currency Conversion: Difference between revisions
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Revision as of 21:27, 31 July 2008
-- NEOSYS SUPPORT --: eg foreign currency handling
i have just thought of a beautiful 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 --: there is a CONTROL by having TWO sets of accounts
control means checking versus something else
ok the same trick is done with currency
we keep TWO sets of books
one in pure currency
and one in pure base currency
complete two sets of books for the whole company
in parallel
-- 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 in the P&L where it causes endless pain to them if wrong
-- CLIENT --: aha. ok
-- NEOSYS SUPPORT --: they always come whining about neosys generating exchange gains and losses
and then have to mend their ways
ideally for them ... the currency books and the base currency books would never be compared
so you can DEAL WITH YOUR CLIENTS IN ONE WAY AND REPORT TO YOUR BOSSES IN ANOTHER WAY
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
-- CLIENT --: ok. i havent done much with multicurrency so far.. is that in the latest version already?
-- NEOSYS SUPPORT --: it has been in since year zero
-- CLIENT --: ok
-- NEOSYS SUPPORT --: but you dont seem to grasp what I am saying
-- CLIENT --: i do understand what you are saying, but practically i havent tried it as yet
-- NEOSYS SUPPORT --: you cant TRY a concept
accountants are scitzphrenic
one 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
-- 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
currency is just a comment on the essential 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
-- CLIENT --: ok. i will copy this convo to wiki for future reference
-- NEOSYS SUPPORT --: really need paper/white board to show it
imagine this ...
you can ask for neosys financial reports for any single currency that you like and it will focus soley 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"
"
!
it just presents them to you as a consolidated position so you think you have one set of books
20 currencies ... in neosys corresponds to 4 separate books of accounts
40 not 4
each currency has its currency amount and its base amount
-- CLIENT --: yes. 20 in the base and 20 in the foreign currency
same set
ok
-- NEOSYS SUPPORT --: so neosys DOESNT MIX CURRENCIES AT ALL DEEP DOWN
it will happily prepare reports for the whole lot merged
but that is a reporting choice
it isnt part of the system
in a neosys client whose base currency is AED, in settings you can select USD only and UNCONVERTED
and 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 Astrids problem
-- NEOSYS SUPPORT --: this? meaning which bit of the above
-- CLIENT --: ledger printouts in multi-currency
-- NEOSYS SUPPORT --: thats vague
-- CLIENT --: requesting for specific currency ledgers of a particular account
-- NEOSYS SUPPORT --: when you send statements it AUTOMATICALLY prints the currency slices separately
since clients a) couldnt give a damn 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 THEM ALL INTO A SINGLE NEOSYS ACCOUNT
a classic error that accountants make with neosys 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
you can happily post one currency into the bank and a different currency into the client though
Sent at 5:46 PM on Sunday
-- CLIENT --: ok. so while posting receipt we have to calculate the equivalent for the client and enter it and the actualy amount to the bank can be overridden.
-- NEOSYS SUPPORT --: 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
yes
Sent at 5:48 PM on Sunday
-- 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 --: yes but that isnt one of the questions
-- CLIENT --: no. i was just clarifying this
-- NEOSYS SUPPORT --: this is a receipt so we are increasing the bank and droping the amount the client owes us
+bank -client
-- CLIENT --: right, but doesnt he client a/c also have to be in USD?
-- NEOSYS SUPPORT --: why?
it can just be a note on the transaction
-- CLIENT --: ok. got it.. sorry. you cannot use USD receipt to pay off AED invoices
-- NEOSYS SUPPORT --: you MIGHT do a two step process
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 (assuming we are not charging him an exchange commission)
but all this doesnt answer my questions
Sent at 5:59 PM on Sunday
-- 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
Sent at 6:05 PM on Sunday
-- CLIENT --: 2000USD
-- NEOSYS SUPPORT --: those little + and - mean nothing?
-- CLIENT --: zero?
-- NEOSYS SUPPORT --: yes
what is +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 --: in the sense?
-- NEOSYS SUPPORT --: i guess they mean nothing to you
-- CLIENT --: no. it isnt it. 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 has to be turned into single currency accounting using a new concept call the "intercurrency conversion" account if the base amounts 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 balances independently and can be viewed as standing alone from all other currencies
Sent at 6:23 PM on Sunday
-- CLIENT --: ok
incase you had to directly post the USD to the client aswell?
-- 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
Sent at 6:29 PM on Sunday
-- 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 and 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
-- 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
-- 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 dirhams
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.
i got to leave now, its 7 pm. i will catch up later with you
-- NEOSYS SUPPORT --: ok bye .. have you copied this from the beginning?
-- CLIENT --: yes. all is saved