Peppermint allows you too open accounts in foreign currencies. Each time that you book to a foreign currency account, you enter the amount of the booking in the original currency, then using an exchange rate, convert the amount into the book-keeping currency.
When booking to assets or liabilities, the balance of the accounts in foreign currency are meaningful. The represent your risk, or your asset. If the exchange rate fluctuates, your position will be undervalued or overvalued. Common booking practices require you to adjust the asset or liability value to the new exchange rate.
An adjustment will imply a booking that will be ZERO in the account's currency, and the amount of the adjustment, in Book-Keeping currency.
Example : (book-keeping currency is CHF)
We borrow 1000 EUR to a bank. The exchange rate, at the day of the contract was 1 EUR = 1.10 CHF
We Credit the bank account of -1000 EUR, at 1.10, = -1100 CHF.
At month end, when we need to produce reports, the EUR/CHF exchange rate is 1.20 CHF.
As a result, the 1000 EUR debt is now 1200 CHF. We owe 100 CHF more. We have made un unrealized loss on exchange.
We should adjust our accounts with this booking :
Credit Bank Account of ZERO EUR (we owe the same amount in EUR, 1000), and of -100 CHF. (to correct the debt to be -1200 CHF)
Debit P&L Unrealized loss on exchange (CHF account) of 100 CHF.
In our Balance Sheet we will show a Bank Loan of -1000 EUR value -1200 CHF. The affects our P&L with an unrealized loss on exchange of 100 CHF
Setting up Peppermint for automatic revaluation entries
We will need to open accounts to book the unrealized Profit or Loss on Exchange. Based on your activity, you may have one account, for all gains or losses on exchange, or one account per currency.
In the chart of accounts, you will decide for each foreign currency account how you would like the revaluation entries to be booked.
To make things easier, in Peppermint we decided to let you define revaluation rules. One rule is given a name. In the chart of accounts, you assign to each foreign currency account, either nothing (means no rule, implies that that account will not be revalued), or one of your defined revaluation rules. This is done with a drop down selection list.
Fig. How to define Revaluation rules.
Fig, What must you set in a revaluation rule
Chart of account, Edit a foreign currency account and define the revaluation rule.
You can easily check visually in the Chart of accounts if the rules are well chosen.
After the revaluation process is completed, these will be the resulting entries booked (provisional).