Banking & Investing

How do I record a US$ or other foreign currency transaction?

Staff Post
By Heather Young

Accounting logic says that your financial statements must be denominated in one currency. Many organizations make regular payments to foreign artists, suppliers and others – so how can they record the transactions correctly?

Let’s take two cases.

In the first instance, let’s assume you only have a Canadian dollar bank account. That means you’re purchasing foreign currency (e.g. bank drafts or wire transfers) as needed. The bank calculates the cost in Canadian dollars by applying today’s exchange rate. This becomes your expense.

Suppose you’ve engaged an American soloist and agreed to pay them $2,500. The day you purchase the US draft, the US dollar is trading at 1.23. Your artist fee expense becomes 2,500 x 1.23 = $3,075.00, and you’ll see that amount being withdrawn from your Canadian bank account.

In this instance, the $2,500 US dollars don’t appear in your accounting records: the only value that counts is the Canadian equivalent. And, yes, that amount depends on the day! Yesterday the US dollar might have been worth 1.22 and tomorrow it might be 1.24! That doesn’t matter: what counts is the prevailing rate on the day of the transaction, because that determines how many Canadian dollars came out of your account. It is important to add a memo/note to the journal entry to indicate that the fee was $2,500 US dollars. This will create a link between the original fee agreement and the amount withdrawn from the bank, in case it is ever in question.

The process is different – and a little more complicated – if your organization owns a US dollar bank account. Now, the $2,500 US dollars must be part of your accounting entry, because that’s the number of US dollars you’re expending. Your accounting system must accomplish the following:

Record the number of units of the foreign currency you hold. (So, if you have $3,456 US dollars in the US bank account, that’s the number you should be looking at on your balance sheet.)
Record the correct value of that asset. (So, if you have $3,456 US dollars and today’s rate is 1.23, those US dollars are presently worth $3,456 x 1.23 = $4,250.88 Canadian.)
Record US revenues and expenses at the Canadian equivalent. (So, if you’re using $2,500 of those US dollars to pay your soloist, you must record an expense of $3,075 as calculated above.)

Many organizations deal with the problem by pairing the US bank account with a second asset account, named “Revalue US Dollars” or something similar. The foreign bank account captures the number of units of the foreign currency you hold. The paired account captures the difference in value to the Canadian dollar.

Thus, if your organization held $3,456 US dollars and the exchange rate was 1.23, the Revalue US Dollars account would contain $794.88.

Your entry to pay the American soloist would look like this:

How to record a US$ transaction - journal entry 1

This entry states the true cost of the soloist; it updates your US bank balance correctly; and it revalues your asset (those US bucks) according to today’s exchange rate.

Let’s take another example – a deposit. Suppose an American visitor paid for their ticket in US dollars. If they paid $45.00 US a day when the US dollar was worth 1.23, your entry would look like this:

How to record a US$ transaction - journal entry 2

Now: the face value of that ticket may have been some other amount. But, as a matter of fact, at today’s exchange rate you made $55.35 Canadian – so that becomes your revenue. 

As the month proceeds, you might have any number of transactions, each valued at the day’s exchange rate. Because the rate floats up and down, the amount in your “Revalue US Dollar” account eventually becomes inaccurate. For that reason, it’s important to “true up” the value of your US dollars from time to time. 

Many organizations would make a separate entry on the last day of the month to update their US currency to the month-end rate. 

Using the examples above, we started with $3,456.00 US dollars. We spent $2,500.00 and deposited $45.00 – bringing the account balance to $1,001.00. 

And, the Revalue US Dollar account started at $794.88; we subtracted $575.00 and added 10.35, bringing the account balance to 230.23.

Let’s say that the exchange rate on the last day of the month was 1.25. At that rate, our $1,001.00 is actually worth $1,251.25. Our month-end balance sheet misstates the value of the US dollars. The following entry “trues up” to the current Canadian equivalent. 

How to record a US$ transaction - journal entry 3

Note that this adjustment isn’t tied to any particular transaction: it simply corrects for the month-end exchange rate. The “pick-up” is allocated to a revenue account that specifically captures currency gain or loss. In months when the US dollar increases in value, you show a gain, because your “greenbacks” are worth more. But, when the Canadian dollar surges, you show a loss on your American currency.

These techniques allow you to have a foreign currency bank account – while still ensuring that your asset, and your revenues and expenses, are properly stated at their Canadian values. 

What’s the least expensive way to manage credit card processing?

Staff Post
By Heather Young 

I’ve been asked for advice on the least-expensive way to manage credit card processing.

Over the last number of years, sales by cash and cheque have dwindled, and the majority of earned revenues and individual donations are received by credit and debit cards and other forms of electronic transfer. In the past, processing fees applied only to a slice of our revenue base: now the “bite” can be significant.

On the plus side, the market is becoming more and more competitive. It’s not that long ago that we all had to have multiple bank accounts if we wanted to accept multiple payment methods, because some banks were allied with Visa and others with MasterCard. These days, numerous payment processors accept all major credit cards and funnel them to the bank of your choice

The array of payment methods continues to multiply. A quick Google search turned up the factoid that direct debit was invented only in 1984. More recently, arts organizations started wrangling the 24/7 payment universe as they put their box offices online. The next generation includes methods of accepting payments by smartphone – and the evolution will continue.

If you haven’t examined your payment processing costs (and methods) lately, maybe it’s time to shop around.

I put the question of inexpensive processing for Canadian non-profits to a number of LinkedIn groups, which provide a forum for sharing knowledge among colleagues internationally. The summary that you’re reading is therefore not the product of systematic research, but rather the contributions of a number of generous folk from Canada and the US who offered their recommendations, with a little fact-checking on my end.

I’m sure this list is far from exhaustive, but it’s a good starting point for comparison shopping. Readers will need to investigate which options are best suited to their needs.

The grid below captures an array of processors. It is followed by additional tips and recommendations from LinkedIn members. Thanks to them for these great ideas!

Name of ServiceOperating in…WebsiteAccepts (per website description)Comments
5LINX Credit Card Processing / Pivotal PaymentsCanadahttp://everyswipecounts.5linx.comCredit and debit cardsThey promise the lowest discount rates in the industry.
Canada HelpsCanadahttp://www.canadahelps.orgCan accept gifts of securities as well as credit cards.A registered charity in their own right. Processes donations for other charities. Not the best rates, but you don’t have to establish your own accounts.
Chase Paymentech CanadaCanadahttp://en.chasepaymentech.caCredit cards, debit cards, online payments.
Elavon Merchant Credit Card ProcessingCanada, Visa, AmEX, Discover, DebitOffered through Costco.
FirstData CanadaCanadahttp://www.firstdatacanada.caMasterCard, Visa, AmEx, Discover, Interac
Global Payment SystemsCanada and debit cards.
IATSCanada, debit, point of sale, QR codes and mobile giving.Canadian company, focused on non-profits. A Ticketmaster subsidiary.
MOCA (Momentum Canada) Payment SystemsCanadahttp://www.mocapayments.comVisa, Mastercard, AmEx, Discover, chip and pin ATM cards.Geared to small and mid-sized retailers in Canada.
MonerisCanadahttp://www.moneris.comAll major credit and debit cards and all major point of sale solutions.
Optimal PaymentsCanadahttp://www.optimalpayments.comCard and non-card payments; chanels like IVR, MOTO and virtual terminal.LinkedIn user reports no hidden fees; just one monthly charge and credit card fee.
PayPalCanadahttps://www.paypal.comMasterCard, Visa, AmEx, Discover
SquareCanadahttps://squareup.comMasterCard, VisaNew in Canada, October 2012. Card reader attaches to iPhone or iPad. See YouTube demos.

And now a few comments from LinkedIn contributors:

Usually if you are a member of the local chamber of commerce or other similar association they have better rates than being on your own.

…Gwendoline Turpin, via Bookkeepers Club

You need to be careful when investigating payment processors. Many that we looked at offered an attractive rate but then hit you with additional fees and monthly charges that make it more expensive.

Ian Hayes, via Non-Profit Professionals Toronto

I have approximately 150 arts clients across Canada using our Theatre Manager software and the majority of these (95%+) are non-profits. We’ve built 3 PCI compliant payment gateway interfaces into the software. This allows our clients options on which merchant account provider they want to use. Predominantly, Canadian clients use either Global Payment Systems or Chase Paymentech for merchant accounts. Based on the feedback, I’ve received the fee structures are fairly comparable, but as in indicator, we’ve noticed a growing number of our clients switching to Paymentech. I’m not aware of any ‘special’ rates for non-profits. From what I’ve been told, each organization is vetted based on the merchant account provider’s risk criteria.

…Tod Wilson, via Performing Arts Administrators

I’ve been quite successful negotiating with other processors (Moneris and Global Payments) and obtaining rates equal to or better than those available through Costco. Not just for NPOs and Charities of which I have quite a few, but also for regular retail operations.

The applied rates vary quite a bit depending on the “type” of card – it’s not just about credit card vs. debit card, but affiliate, international, non-VISA/MC cards, etc.

Global Payments (at least) refers to these as Interchange Downgrade Fees (IDF) and produces two tables E5 (enhanced) and E1 (standard). Typical differences between these are between .1% and .5% depending on transaction. E1 is generally what most retailers receive. In addition, they will generally also provide free (or reduced-price) terminals.

The details of the fees are complex as there are 31 card categories. It depends on which your client receives most – and the average value, volume etc. of these.

…Don Hobsbawn, via Sage 50 Canadian Edition Sage Accountants Network Members

Don is absolutely correct. If you know the number of monthly transactions, monthly volume in $, average transaction amount and types of cards being used you can negotiate better rates from your Merchant Account Provider (MAP).

If you already have a merchant account you should compare the numbers at the end of your first year with the numbers forecast when the agreement was put in place. You may be able to renegotiate the contract for a better rate if the numbers are higher than the initial projections.

It also doesn’t hurt to let your existing MAP know that you are shopping around. That can motivate them to offer better rates, or even to match the best rate you can find.

To provide the most flexibility in payment types NFP’s & Charities can look at a Paypal Merchant Account that offers many donor / payment options through a website gateway.

If the NFP / Charity is small, and don’t want to carry the monthly fees and equipment rental costs they can look at “Card Not Present” or online based systems that may offer reduced rates.

There are also fee based organizations that provide payment options for Registered Charities that may not have the infrastructure to provide payments, anonymous or recurring donations and tax receipts. They take a percentage of each donation, then EFT the balance to the Charity.

Before you recommend any of these options you’ll need to conduct a thorough assessment of the needs of the organization to help find the best fit! If you’d like to evaluate the different MAP’s there’s a guide on building a spreadsheet to do so at:

…Dave Greene, via Sage 50 Canadian Edition Sage Accountants Network Members

(Note on Dave’s last suggestion: the link takes you to the website of FirstData, which of course wants you to use their service! However, they provide useful generic information on how to evaluate your options.)

How can I know for sure what’s in the bank? The bank statement isn’t the same as my books…

It’s typical for the bank statement to show a different month-end balance from your general ledger.

Now that online access to banking records is so prevalent, it’s easier to keep track of the differences. However, they still exist, and you need to understand why.

For one thing, you need to pick up bank charges and any interest earned. For another, there may be errors to deal with – yours or the bank’s – which must be identified and corrected by comparing the two sets of records. Finally – and most significantly – there are timing differences between when you initiate a transaction and when the bank sees it.

Your books record payments and deposits in the order in which you issue them. The bank’s records will also contain these amounts – but in the order in which they were presented at the bank. That might be quite a different thing!

Let’s say you issued a batch of cheques dated on the 25th of the month. Getting them signed and into the mail took a couple of days. Some payees may have received and banked their cheques before the 30th, but others won’t cash them till the new month. As far as your books are concerned, these cheques are all current month items – but from the bank’s point of view, some belong to this month and some to next.

Therefore, at the end of this month, the bank will have a higher balance than your books, because the bank doesn’t know what cheques may be in transit.

As this example demonstrates, it’s very important for you to keep your bookkeeping up to date, and use your balance rather than the bank’s. Once you’ve issued a payment, you need to assume the money is gone, even if it hasn’t cleared from your account. You don’t want to try spending the same money twice!

The same problem can happen with other transactions. The deposit you made at the ATM on Friday may not be processed by the bank until Monday. The online purchase you made, or the online donation that a supporter made from their home may be logged on your system today, but may not arrive in the bank’s records until tomorrow.

The tool that you need to understand is the bank reconciliation. It is the document that proves your bookkeeper has compared your general ledger to the bank statement, and identified all problems and timing differences to the penny. If you put your general ledger at your right hand, the bank statement at your left hand, and the bank rec document in the middle, you should be able to see your balance, the bank’s balance, and an itemized explanation of any differences.