Home currency adjustment in QuickBooks Online

As someone with many clients using the QuickBooks® multicurrency function, I help them navigate the Multicurrency feature in QuickBooks Online (QBO). They were rolled out in the various countries’ versions over the last few years, and I’ve been putting them through their paces over time.

The examples in this article were produced in the US version of QBO, but they relate to all countries’ versions that support Multicurrency.

First, let’s look at the transactions I entered. This is a US company, and the home currency is the US dollar. I created a European customer and a European vendor, with whom this company does business in Euro.

On Jan. 1, 2022, my US company invoiced this European customer for €100,000 when the Euro was worth 1.137145 USD (for a home currency value of $113,714.50 USD):

I invoiced the same customer on Feb.14, 2022 for €100,000 again, but this time when the Euro was worth 1.131984 USD (for a home currency value of $113,198.40):

And I received €50,000 from this customer on Feb. 28, 2022, when the Euro was worth 1.11947 USD (for a home currency value of $55,973.50 USD), which I applied to the first invoice:

I had some other foreign transactions in 2022 as well, related to bills and checks, including the purchase of a humongous building in France (the Eiffel Tower … you may have heard of it) that’s denominated in Euro. It’s so cool that I can track a fixed asset on the balance sheet and assign a foreign currency to that account!

If I run a Profit and Loss for the period and uncheck the box in the header for “Show unrealized gain or loss,” and I QuickZoom on the amount for the Exchange Gain or Loss (that is the realized Gain or Loss only), I get the list of transactions that automatically generated an exchange gain or loss:

In this case, the list consists of the one payment #5555 received from the Euro customer of €50,000 on the previously generated invoice, with a different exchange rate.

Let’s do the math.

At the time and prevailing rate of exchange, the original invoice #157 for €100,000 was worth $113,714.50 in US dollars – our home currency. When the Euro customer paid half of that, or €50,000, we expected to receive the equivalent of $113,714.50 USD divided by 2, or $56,857.25 USD.

But hold your horses. When payment #5555 for €50,000 was received, the exchange rate had changed to 1.11947, and instead of receiving the equivalent of $56,857.25 USD, we received the equivalent of $55,973.50 USD. The difference between $56,857.25 USD and $55,973.50 USD is an $883.75 USD Foreign Exchange Loss (since we received less than we expected to receive in the home currency, once the exchange rate difference sorted itself out). Therefore, this amount appears as an Other expense on the Profit and Loss report for the period.

That’s great!

Now, let’s get back to the Profit and Loss report. I specifically unchecked the “Show unrealized gain and loss” checkbox in the header section (it’s checked by default, so I had to uncheck it and select Run report). It is available in other reports, too. What does this checkbox do?

If we keep this box checked and click on Run Report with no other transactions having been entered, not a whole lot changes yet, except for an Unrealized Gain or Loss line with a $0.00 balance appearing in the Profit and Loss report:

That’s because QuickBooks is saving that line for Currency revaluations. Currency revaluations allow you to take outstanding foreign balances on your balance sheet and revalue them at given points in time to account for differences in the exchange rate. Sometimes, companies will do Currency revaluations only at the end of a fiscal year, while others don’t bother at all. But when there are wild swings in a currency’s exchange rate with the home currency, and when the balances in a foreign currency are large, these balances should be adjusted regularly, as the amount of the adjustments can be quite substantial and can have a major impact on a company’s financial statements.

Don’t believe me? Let’s take a hypothetical example, with the Marx Brothers’ fictitious foreign country, Freedonia, from the movie “Duck Soup.” I’m going to name the Freedonian unit of currency the “Freedo” (monetary symbol F), and when it first goes into circulation, it’s at par with the US dollar. (Bear in mind that the example below is just that; fake currencies cannot be created in QuickBooks Online)

Imagine this:

My US company, which has a calendar year-end, sells widgets to a Freedonian customer for F100,000, worth $100,000 USD on Dec. 1, 2021. On top of that, my company buys a building in Freedonia City, the capital, for F5,000,000, worth $5,000,000 USD on Dec. 15, 2021. I capture all this in QBO. By the way, it’s nice to know that QBO lets me assign a foreign currency to fixed asset accounts, in addition to any balance sheet account other than equity, accounts receivable, and accounts payable accounts. That’s a huge improvement over QuickBooks Desktop.

Now, imagine that on Dec. 20, 2021, there is a huge coup in Freedonia and a state of uncertainty ensues. The government collapses and the Freedo is now worth about $.05 USD. My Freedonian customer is still in business, as he’s supplying widgets to the Freedonian rebels, so I’m not writing off the receivable to bad debt. I know I’ll get my F100,000 eventually in 2022, but what will they be worth in US bucks? And what about my Freedonian building?

This would call for a Currency revaluation on Dec. 31, 2021, to account for the revised value of my Freedonian assets (and Freedonian liabilities, if I had any). That would result in an Exchange loss of $95,000 USD on the receivables and another loss of $4,750,000 USD on the building. Even if I had Freedos stuffed into a mattress as an asset on my balance sheet, I’d have to revalue those as well. This could be the difference between a black bottom line and a red one. The Currency revaluation is vital to capture everything regarding the health of a business, especially one that has major dealings with other countries in their currencies.

OK, now that we’ve established the need for Currency revaluations, let’s get back to our example with real currencies and transactions in QBO.

Let’s pretend we want to revalue the Euro balances as of March 31, 2022. We click on the Gear icon > Currencies to get to the Currency list.

Then, in the Action column next to the Euro, click on the drop-down next to Edit currency exchange, and then select Revalue currency.

The Revalue EUR against USD screen appears with today’s date and, in the Open Balances tab, today’s balances appear by default.

I change the Revalue date to March 15, 2022 (yes, that’s weird; we normally revalue currencies and their balances on a month end, but I’m writing this before the end of March) and the exchange rate for the chosen currency (the Euro) with the home currency (USD) automatically changes to the market rate on that date, but I can overwrite it with a custom rate if I want. In fact, let me do that.

I choose that the Euro is worth 1.15 USD on March 15, 2022. I add a memo, choose to revalue all the Euro balances on that date (by having the boxes next to all accounts checked, although I could pick and choose), and click on Revalue and Save.

Now, I get a confirmation that the exchange gain or loss (unrealized, that is) can be viewed on the Profit & Loss, Balance Sheet, and the Customer Balance and Vendor Balance reports (if you check the box next to “Show unrealized gain and loss” at the top of each report). By the way, the exchange gain or loss can also be viewed on the Statement of Cash Flows report. This report also features the “Show unrealized gain or loss” checkbox at the top.

Now, let’s go back to the Profit & Loss report, with the checkbox next to “Show unrealized gain and loss” checked, and refresh it­:

Now, the Unrealized Gain or Loss appears with a non-zero amount. Let’s QuickZoom in on that figure:

QuickBooks takes every open balance in the A/R and the A/P in Euro and revalues them as of the valuation date. The total unrealized gain or loss will show up in the row for each of these open transactions, so that you can easily see how all home currency adjustments affect each transaction.

The journal entry that it creates, however, is somewhat confusing, and I’m glad that the Memo/Description column has “This is a placeholder for you” in it. Some might see this $0.00 journal entry and be tempted to delete it. Don’t. Ever. Delete. It. Don’t ever delete it!! You’ll ruin everything. And then then the next thing you know, we’ll get invaded and our own home currency will be Freedos.

Back to reality. If you open this $0.00 journal entry that you are not ever deleting, you’ll see something really interesting.

You’ll see that there are two accounts in this journal entry with non-zero figures: The Euro Chequing and the Eiffel Tower at Cost accounts. These two Euro-denominated balance sheet accounts were revalued by the same “Revalue currency” transaction as the A/R Euro and the A/P Euro accounts, but these accounts were treated differently. The revalued Euro Chequing and Eiffel Tower at Cost account balances appear on the balance sheet, regardless of whether the “Show unrealized gain or loss” checkbox is checked. In other words, these accounts reflect realized foreign exchange gains or losses. The same would be true for a revalued foreign credit card account, or any foreign balance sheet account that is not Accounts Receivable or Accounts Payable.

For the time being, the “Revalue currency” transaction will treat foreign Accounts Payable and Accounts Receivable accounts revaluations as unrealized gains or losses. All other foreign balance sheet account (other than equity accounts, which cannot be assigned a foreign currency) revaluations will be treated as realized gains or losses.

Since the $0.00 placeholder journal entries are confusing to the naked eye, you may be wondering where to find reports on how foreign balances were revalued. For that kind of information, you would go back to the Revalue screen by clicking on the Gear icon > Currencies to get to the Currency list, and then in the Action column next to the Euro (or whatever foreign currency you want), click on the drop-down next to Edit currency exchange and then select Revalue currency. This time, however, click on the Revalue history tab.

There is much more to this story. Multicurrency, foreign exchange, and currency revaluations are not for sissies. These are very complex topics.

Remember, Multicurrency cannot be turned off once it’s enabled, and it’s available in QBO Essentials, Plus, and Advanced subscriptions. It’s also available in all versions of QuickBooks Desktop.

If you want to learn more about Multicurrency in QuickBooks, reach out to Esther at esther@e-compubooks.com.

Esther has already created a self-paced course on Multicurrency in QuickBooks Desktop. Get more info here. A course on Multicurrency in QuickBooks Online is next on her agenda.

Editor’s note: This article was originally published on Dec. 13, 2018, and updated with all new content on March 28, 2022.