Exchange rates are something you typically pay attention to when processing foreign currency transactions in your accounting package.
In Zambia today, businesses that have never dealt with any currency other than the ZMK Zambian Kwacha
must contend in one way or another with exchange rates for Euros, Pounds, Rand and US dollar.
In simple terms, if you want to exchange Zambian currency for that of another’s you’ll need the Zambian Kwacha exchange rates. These exchange rates will show you the relative, or ratio of the ZMK to USD and other currencies.
Only a handful of Accounting packages handle multiple currency transactions correctly. Yet, it is one thing to have software solution with multiple currency support, but fluctuating exchange rates can result in excessive unrealized gain or loss if not processed correctly and Accounting for these adjustments can be more difficult than it first appears.
In this tutorial, I will show you how to use your historical exchange rates correctly and avoid excessive unrealized gain or loss on exchange.
From this screen shot, on 18th May 2010, Smith made advance payment of USD 10, 108.96 for the purchase of equipment and the exchange rate on the Bank of Zambia website was ZMK 5050.
On 8th September 2010, received his equipment with an invoice value of USD 10,108.96 but the exchange rate had fluctuated to ZMK 4980. When posting the purchase in his Accounting package, Smith decided to use the new exchange rate of ZMK 4980 leaving an outstanding balance of ZMK 707,627 on the account. Later, he decided to reverse the transaction at the exchange rate of ZMK 5050.
As at 19th November, this account was showing that Smith had made an overpayment of ZMK 707,651 when in fact not.
As you have seen, the effect of fluctuations in exchange rates is either unrealized profit or loss on exchange.
Now, here is how you can use your historical series of your exchange rates to handle these complexities.
When processing a purchase of any prepaid amount, use the same exchange rate used to make the payment. Smith should have posted the purchase using the exchange rate of ZMK 5050.
Secondly, when reversing any wrong entry, always use the same exchange rate. Just like in the given example, Smith processed a purchase of ZMK 51,055,258 at the rate of ZMK 4980 and then reversed it at the rate of ZMK 5050 resulting in a difference on the account.
Undeniably, accounting for fluctuations in exchange rates is much easier using a software package that maintains a historical series of exchange rates and a daily input of exchange rate for each currency in that way you can change between currencies.
About the Author:
Fixed Asset Consultant at Prosperity Agencies Limited with over 10 years practical experience in physical verification, bar-coding of assets and fixed asset software implementation +260 211 239859
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