Working of Inter Currency Conversion: Difference between revisions

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<B>-- NEOSYS SUPPORT --</B>: eg foreign currency handling
== Working of Inter Currency Conversion ==


i have just thought of a beautiful concept that should perhaps illustrate something to you
<B>-- NEOSYS SUPPORT --</B>: NEOSYS, behind the scenes mostly, keeps a complete double entry trial balance and set of accounts for <i>each currency independently</i>.
 
there is an interesting concept that should perhaps illustrate something to you


you know how double entry book keeping stops accountants from making mistakes
you know how double entry book keeping stops accountants from making mistakes
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<B>-- CLIENT --</B>: yes
<B>-- CLIENT --</B>: yes


<B>-- NEOSYS SUPPORT --</B>: there is a CONTROL by having TWO sets of accounts
<B>-- NEOSYS SUPPORT --</B>: double entry accounting works by implementing a CONTROL


control means checking versus something else
control means checking versus something else


ok the same trick is done with currency
In NEOSYS the same trick is done with currency


we keep TWO sets of books
'''NEOSYS keeps TWO sets of double entry books'''


one in pure currency
one in pure currency per currency


and one in pure base currency
and one in pure base currency per currency


complete two sets of books for the whole company
complete two sets of books for the whole company


in parallel
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


<B>-- CLIENT --</B>: thats in the current system
<B>-- CLIENT --</B>: thats in the current system
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ok
ok


<B>-- NEOSYS SUPPORT --</B>: this is any company using neosys and trading in currency
<B>-- NEOSYS SUPPORT --</B>: this is any company using NEOSYS and trading in currency


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


<B>-- CLIENT --</B>: aha. ok
<B>-- CLIENT --</B>: aha. ok


<B>-- NEOSYS SUPPORT --</B>: they always come whining about neosys generating exchange gains and losses
<B>-- NEOSYS SUPPORT --</B>: initially there are a lot of queries about NEOSYS generating exchange gains and losses


and then have to mend their ways
but in the end NEOSYS has always proved to be correct


ideally for them ... the currency books and the base currency books would never be compared
in some companies which are not sophisticated currency-wise, the currency books and the base currency books are never really compared


so you can DEAL WITH YOUR CLIENTS IN ONE WAY AND REPORT TO YOUR BOSSES IN ANOTHER WAY
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
client/suppliers/banks only care about currency
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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
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


<B>-- CLIENT --</B>: ok. i havent done much with multicurrency so far.. is that in the latest version already?
accountants must be schizophrenic.


<B>-- NEOSYS SUPPORT --</B>: it has been in since year zero
on one hand they have to deal with real currency with their clients/suppliers/banks ... and the base equivalent is IRRELEVENT to operations


<B>-- CLIENT --</B>: ok
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


<B>-- NEOSYS SUPPORT --</B>: but you dont seem to grasp what I am saying
NEOSYS facilitates this necessary schizophrenic view but at the same time meticulously ensures that the two alternative views are reconcilable
 
<B>-- CLIENT --</B>: i do understand what you are saying, but practically i havent tried it as yet
 
<B>-- NEOSYS SUPPORT --</B>: 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


<B>-- CLIENT --</B>: i get the concept
<B>-- CLIENT --</B>: i get the concept
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ie if you add up all the foreign currency from all the accounts .. it doesnt balance
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 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
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"
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
four line voucher where you expected to see only two lines that you entered
<B>-- CLIENT --</B>: ok. i will copy this convo to wiki for future reference
<B>-- NEOSYS SUPPORT --</B>: really need paper/white board to show it


imagine this ...
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
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
ignoring all the other currency transactionsx


so not only does neosys keep complete parallel double entry books for currency and base separately
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 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
 
!
 
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
if you transact in 10 currencies ... NEOSYS keeps 20 separate books of accounts


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


<B>-- CLIENT --</B>: yes. 20 in the base and 20 in the foreign currency
<B>-- CLIENT --</B>: yes. 10 in the base and 10 in the foreign currency


same set
same set
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ok
ok


<B>-- NEOSYS SUPPORT --</B>: so neosys DOESNT MIX CURRENCIES AT ALL DEEP DOWN
<B>-- NEOSYS SUPPORT --</B>: so NEOSYS DOESNT MIX CURRENCIES AT ALL DEEP DOWN


it will happily prepare reports for the whole lot merged
as you would expec, NEOSYS will prepare financial reports for all currencies consolidated


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


it isnt part of the system
in a NEOSYS client whose base currency is AED, in settings you can select USD only and option: UNCONVERTED


in a neosys client whose base currency is AED, in settings you can select USD only and UNCONVERTED
then you will see a SLICE of the company which is purely USD transactions
 
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.
and the two sides of that slice are the USD amount and the base equivalent of those USD transactions alone.
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<B>-- CLIENT --</B>: ok.
<B>-- CLIENT --</B>: ok.


i noticed this while investigating Astrids problem
i noticed this while investigating ledger printouts in multi-currency


<B>-- NEOSYS SUPPORT --</B>: this? meaning which bit of the above
<B>-- CLIENT --</B>: when you send statements to clients from NEOSYS it will print the currency slices separately without any base currency showing


<B>-- CLIENT --</B>: ledger printouts in multi-currency
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


<B>-- NEOSYS SUPPORT --</B>: thats vague
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


<B>-- CLIENT --</B>: requesting for specific currency ledgers of a particular account
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
 
<B>-- NEOSYS SUPPORT --</B>: 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
this ISOLATION of currencies from each other is the reason why you CANNOT ALLOCATE ONE CURRENCY TO ANOTHER DIRECTLY in NEOSYS
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you cannot use USD receipt to pay off AED invoices directly
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
however you can happily post one currency into the bank and a different currency into the client in a single transaction
 
Sent at 5:46 PM on Sunday
 
<B>-- CLIENT --</B>: 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.


<B>-- NEOSYS SUPPORT --</B>: 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
=== Intercurrency conversion WITHOUT gain/loss - Intercurrency Conversion Account ===


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


Sent at 5:48 PM on Sunday
<B>-- NEOSYS SUPPORT --</B>: 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


<B>-- NEOSYS SUPPORT --</B>: 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)
<B>-- NEOSYS SUPPORT --</B>: 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)
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2. client a/c -3670AED (-3670base)
2. client a/c -3670AED (-3670base)


and neosys adds
and NEOSYS adds


3. Intercurrency conversion account -1000USD (-3670)
3. Intercurrency conversion account -1000USD (-3670)
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<B>-- CLIENT --</B>: the client account should be -1000USD (-3670base) . right?
<B>-- CLIENT --</B>: the client account should be -1000USD (-3670base) . right?


<B>-- NEOSYS SUPPORT --</B>: yes but that isnt one of the questions
<B>-- NEOSYS SUPPORT --</B>: 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


<B>-- CLIENT --</B>: no. i was just clarifying this
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


<B>-- NEOSYS SUPPORT --</B>: this is a receipt so we are increasing the bank and droping the amount the client owes us
DR +bank


+bank -client
CR -client


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


<B>-- NEOSYS SUPPORT --</B>: why?
<B>-- NEOSYS SUPPORT --</B>: no need and remember we already debited the client with some AED invoices in AED.


it can just be a note on the transaction
The USD is certainly information available on the receipt voucher but the entry on the clients account is formally AED.


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


<B>-- NEOSYS SUPPORT --</B>: you MIGHT do a two step process
<B>-- NEOSYS SUPPORT --</B>: 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
ie credit the clients account with 1000USD as a first step
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crediting and debiting the same a/c
crediting and debiting the same a/c


no change in the base currency (assuming we are not charging him an exchange commission)
no change in the base currency on the second stage (assuming we are not charging him an exchange commission)
 
but all this doesnt answer my questions


Sent at 5:59 PM on Sunday
but all this doesnt answer the questions I posed initially


<B>-- CLIENT --</B>: q1. what is the total amount of USD posted - 1000 USD to the Bank and 1000 USD to the Intercurrency conversion account
<B>-- CLIENT --</B>: q1. what is the total amount of USD posted - 1000 USD to the Bank and 1000 USD to the Intercurrency conversion account
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<B>-- CLIENT --</B>: its only 1000 USD which gets posted
<B>-- CLIENT --</B>: its only 1000 USD which gets posted


<B>-- NEOSYS SUPPORT --</B>: 1. bank a/c +1000USD (+3670base)
<B>-- NEOSYS SUPPORT --</B>:
 
1. bank a/c +1000USD (+3670base)
 
2. client a/c -3670AED (-3670base)
2. client a/c -3670AED (-3670base)
3. Intercurrency conversion account -1000USD (-3670)
3. Intercurrency conversion account -1000USD (-3670)
4. Intercurrency conversion account +3670AED (+3670base)
4. Intercurrency conversion account +3670AED (+3670base)


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arithmetic total
arithmetic total
Sent at 6:05 PM on Sunday


<B>-- CLIENT --</B>: 2000USD
<B>-- CLIENT --</B>: 2000USD


<B>-- NEOSYS SUPPORT --</B>: those little + and - mean nothing?
<B>-- NEOSYS SUPPORT --</B>: those DR/CR mean something, the + and - are a clue


<B>-- CLIENT --</B>: zero?
<B>-- CLIENT --</B>: zero?
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<B>-- NEOSYS SUPPORT --</B>: yes
<B>-- NEOSYS SUPPORT --</B>: yes


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


<B>-- CLIENT --</B>: 0
<B>-- CLIENT --</B>: 0
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1. bank a/c +1000USD (+3670base)
1. bank a/c +1000USD (+3670base)
2. client a/c -3670AED (-3670base)
2. client a/c -3670AED (-3670base)
3. Intercurrency conversion account -1000USD (-3670base)
3. Intercurrency conversion account -1000USD (-3670base)
4. Intercurrency conversion account +3670AED (+3670base)
4. Intercurrency conversion account +3670AED (+3670base)


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how do you feel about those answers
how do you feel about those answers


<B>-- CLIENT --</B>: in the sense?
<B>-- CLIENT --</B>: the intercurrency conversion account is used as the contra account for the first 2 entries
 
<B>-- NEOSYS SUPPORT --</B>: i guess they mean nothing to you
 
<B>-- CLIENT --</B>: no. it isnt it. the intercurrency conversion account is used as the contra account for the first 2 entries


<B>-- NEOSYS SUPPORT --</B>: q1. what is the total amount of USD posted .. answer zero
<B>-- NEOSYS SUPPORT --</B>: q1. what is the total amount of USD posted .. answer zero
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oh. ok
oh. ok


<B>-- NEOSYS SUPPORT --</B>: 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
<B>-- NEOSYS SUPPORT --</B>: 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
we have to invent something called ICC (get it?) in order to reduce all multicurrency transactions to combinations of single currency transactions
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<B>-- NEOSYS SUPPORT --</B>: what seems like a complexity in the voucher turns out to have radically simplifying effect on the books
<B>-- NEOSYS SUPPORT --</B>: 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
ie every currency will balance independently and can be viewed as standing alone from all other currencies
 
Sent at 6:23 PM on Sunday


<B>-- CLIENT --</B>: ok
<B>-- CLIENT --</B>: ok


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


<B>-- NEOSYS SUPPORT --</B>: i gave the answer in detail already ...
<B>-- NEOSYS SUPPORT --</B>: i gave the answer in detail already ...


<B>-- CLIENT --</B>: 1. bank a/c +1000USD (+3670base)
<B>-- CLIENT --</B>:
 
1. bank a/c +1000USD (+3670base)
 
2. client a/c -1000USD (-3670base)
2. client a/c -1000USD (-3670base)


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you can think that the client is your banker by the time of this second voucher
you can think that the client is your banker by the time of this second voucher
Sent at 6:29 PM on Sunday


<B>-- CLIENT --</B>: you mean debit the client?
<B>-- CLIENT --</B>: you mean debit the client?
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in case you credit client with 1000USD and LATER decide to use it to pay off AED invoices
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
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
 
<B>-- CLIENT --</B>:
 
1. client a/c +1000USD (+3670base)


<B>-- CLIENT --</B>: 1. client a/c +1000USD (+3670base)
2. client a/c -3670AED (-3670base)
2. client a/c -3670AED (-3670base)
3. Intercurrency conversion account -1000USD (-3670base)
3. Intercurrency conversion account -1000USD (-3670base)
4. Intercurrency conversion account +3670AED (+3670base)
4. Intercurrency conversion account +3670AED (+3670base)


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<B>-- CLIENT --</B>: ok
<B>-- CLIENT --</B>: ok
=== Intercurrency conversion WITH gain/loss - Exchange Gain/Loss Account ===


<B>-- NEOSYS SUPPORT --</B>: 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
<B>-- NEOSYS SUPPORT --</B>: 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
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<B>-- NEOSYS SUPPORT --</B>: we would like to post this ...
<B>-- NEOSYS SUPPORT --</B>: we would like to post this ...
1. bank a/c +1000USD (+3670base)
1. bank a/c +1000USD (+3670base)
2. client a/c -3700AED (-3700base)
2. client a/c -3700AED (-3700base)


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3. GainLossA/c -1000USD (+3670base)
3. GainLossA/c -1000USD (+3670base)
4. GainLossA/c +3700AED (+3700base)
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)
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
and it reverses them into a different a/c ... the famous Exchange Gains and Loss A/c
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q1. what is the total amount of USD posted
q1. what is the total amount of USD posted
q2. what is the total amount of AED 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)
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)


<B>-- CLIENT --</B>: 3. GainLossA/c -1000USD (-3670base)
<B>-- CLIENT --</B>:
 
3. GainLossA/c -1000USD (-3670base)
 
4. GainLossA/c +3700AED (+3700base)
4. GainLossA/c +3700AED (+3700base)


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<B>-- CLIENT --</B>: q3 - 30 AED ?
<B>-- CLIENT --</B>: q3 - 30 AED ?


<B>-- NEOSYS SUPPORT --</B>: read the question
<B>-- NEOSYS SUPPORT --</B>: read the question exactly


<B>-- CLIENT --</B>: yes. i have
<B>-- CLIENT --</B>: yes. i have
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we can say either 30 base or 30 "equalent in AED"
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
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
anyway the answer is as you say, 30 base
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<B>-- NEOSYS SUPPORT --</B>: 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
<B>-- NEOSYS SUPPORT --</B>: 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
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!
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!


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


<B>-- CLIENT --</B>: ok.
<B>-- CLIENT --</B>: ok.
i got to leave now, its 7 pm. i will catch up later with you
<B>-- NEOSYS SUPPORT --</B>: ok bye .. have you copied this from the beginning?
<B>-- CLIENT --</B>: yes. all is saved

Latest revision as of 10:34, 25 February 2018

Working of Inter Currency Conversion

-- 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.