| Description |
You tube video of Scenario 1 and secario 2
[http://somup.com/cF1uXCV7UO]
[http://somup.com/cF1uXRV7UU]
When you create a bank transfer
*Scenario 1:*
Functional currency: USD
Transfer From: USD account
Transfer to: CAD account
Since you are converting to CAD you are going to "establish" the current rate of converison between usd and CAD and recognize no gain or loss. this is because you have usd and you are converting to canadian and there is a current rate so you just have the same amount of funds in a different currency. If
you were to report that on the balance sheet you would have no issue because you have no gain or loss. the rate of conversion is the current rate.
Note that we are using the direct rate - that is the rate that you can multiply one us dollar to get to one canadian dollar
Simple example:
|Transfer to CAD|USD (Debit|CAD (Debit|USD (Credit|CAD (Credit|Rate|
|CAD CASH Account|560|1000| | |1.7857|
|USD Account| | |560|1000| |
No gain or loss should ever be recognized in a transfer from the functional currency to the foreign currency, This is what establishes the rate
*Scenario 2:*
Move the same dollars back to USD and rate has changed
example:
Current Balance of CAD account 560 USD
Current rate .55
|Transfer to CAD|USD (Debit|CAD (Debit|USD (Credit|CAD (Credit|Rate|
|CAD CASH Account|560|1000| | |1.7857|
|USD Account| | |560|1000| |
|CAD Account| | |560|1000| |
|USD Account|550|1000| | |.55|
|Loss|10| | | | |
Since you are converting to usd you are going to recognize a gain or loss on this transaction. this is because you are taking money out of a foreign currency and bringing it back to a functional currency. In this case the GL balance and rate between CAD and USD was established in the past when you created the balance in CAD and now you must remove it from the CAD account in the same ratio you put it in at. Since the transaction went in at .56 we have to take it out at .56 (.56 =1/1.7857) Direct rate.
now if we think of the fact that the balance may be composed of many transactions so we must get the average rate to remove the transaction from usd balance of the cad account or it would never balance. The difference is the gain or loss.
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