Multi-Currency Journal Entries, Ledgers, and Accounts

We will begin with a slightly more challenging topic. Multi-Currency Journal Entries, Ledgers and Accounts.

Question: What are Multi-Currency Journal Entries, Ledgers and Accounts?

Answer: Think of a having a Corporate Customer such as a John Deere who sell and buy products in Canada and USA. As you can imagine, this company would have Accounts in both CAD and USD, allowing them to send and receive payments in both currencies. In this particular example, John Deere has Multi-Currency Accounts based in CAD and USD currency. Now in order to view all the in and out transactions (i.e., money being settled and remitted), you need a ledger for each individual currency to ensure the dollar values match what is in your bank, the last thing any business needs is to have unreconciled accounts (we will get to that later). Effectively the ledger allows any individual to view the activity log of each account and/or currency - this is known as the Multi-Currency Ledger. The individual line items in the activity log of the ledger is known as a Journal Entry. One thing to note, you do not superimpose both currencies in one ledger, they each have their own. If you decide to move funds from one account to the other, an exchange rate transaction must occur.

With this base knowledge, each individual company we onboarded was given all currency accounts from day one, allowing flexibility in payment types and giving students a choice when deciding how funds would be remitted. This also allowed for schools to issue refunds in local currencies as well.

Here is an example: Lets say a student attends the University of Toronto from London, England. The student can remit a Wire Transfer from their bank to our financial institution (i.e., Barclays). We would receive the funds in GBP. Technically this money came into the BrokerFX account as GBP. Now, the money would be transferred to the University of Toronto GBP account as a one for one deal where no exchange rate exists (the other option is to create a journal entry with Cash being credited and the Ledger Account of the Corporate Entity being debited). Now, a second transaction would be created where the GBP is converted to CAD similar to the transaction in the image above. Simultaneously, under the BrokerFX account, a counter party deal (explained later) would be booked where we convert CAD to GBP. This counter party deal is a transaction booked with the bank because we have to get the CAD dollars from somewhere. Note the GBP amount will be the same but the CAD would be different. The difference between the two CAD dollars is the profit. I get this is confusing, we will get into it on a separate post.

Finally, now that we have CAD in University of Toronto’s account, we create a one for one deal and remit the funds to the school (in their local currency).

Phew! That was a lot. Let’s take a breather and do a more in depth example on the next post. See you soon.