Continuing our introductory series on ERPNext features, this time I want to highlight a highly useful feature for users conducting business internationally: Currency Exchange and Multi-Currency Accounting. With ongoing globalization, companies have customers, suppliers, investors, and business partners all over the world. Therefore, these features are essential for international businesses to operate.
Why Are Currency Exchange and Multi-Currency Accounting Important?
Let’s understand this with an example. Suppose there is a company named PT. X, based in Indonesia, and its local currency is IDR. Can PT. X post all their transactions in IDR to simplify bookkeeping? For instance, if PT. X receives a payment from an international client, can they calculate the total in IDR based on the prevailing exchange rate, post the receipt, and simply be done with it?
Certainly not. Doing so would lead to several problems, including the following:
- Clients usually want to receive invoices in their own currency, not in IDR. At the same time, PT. X needs to record its revenue in IDR.
- As a company located in Indonesia, PT. X needs to submit reports regarding payments received from overseas clients, along with currency details, to the government for tax obligations.
- PT. X also has bank accounts in other countries, and the bank statements use those respective countries’ currencies. To perform bank account ledger reconciliation, PT. X needs to post transactions in those foreign currencies. It also needs to track foreign exchange gains or losses when moving money from a bank account in one country to an account in another.
Therefore, Multi-Currency Accounting is crucial for international businesses to run smoothly.
Base Currency
The base currency is the currency of the country where the business is based. Also known as the functional currency, this is typically the currency in which the majority of transactions occur. The base currency is set when creating a Company in ERPNext and cannot be changed later.
Currency in GL Entry (General Ledger Entry)
When a transaction is posted in the base currency, the ‘GL Entry’ will reflect both currencies used. This allows financial statements to be published in the base currency while also enabling reporting in other currencies.
Currency Exchange Rate
Currency exchange rates are handled dynamically by ERPNext through two methods: manual and automatic.
- Manual: You can go to the ‘Currency Exchange’ menu and input the rate yourself by clicking ‘Create New’.
- Automatic: Simply select the currency you want to use during the transaction, and ERPNext will directly fetch the exchange rate from a third-party service like Frankfurter.
Exchange Rate Revaluation
Periodically, assets and liabilities recorded in currencies other than the base currency can be revalued. This involves adjusting their value by posting the gains or losses arising from exchange rate fluctuations. In this context, there are two methods to perform revaluation, which can be done manually or automatically.
Manual Method:
- First, navigate to the Company page and select the company you want to revalue.
- Fill in the ‘Exchange Gain/Loss Account’ and ‘Unrealized Exchange Gain/Loss Account’ fields. These accounts are used to balance the difference between total credits and total debits.
Next, open the ‘Exchange Rate Revaluation’ menu under Accounting > Exchange Rate Revaluation, and click ‘Add New’.
Select the Company and click the ‘Get Entries’ button. This will fetch accounts that have a different currency than the ‘Default Currency’ set for the Company. It will automatically fetch the new exchange rate if one isn’t set in the Currency Exchange Document for that specific currency; otherwise, it will use the ‘Exchange Rate’ specified in the Currency Exchange Document.
Once submitted, the ‘Create Journal Entry’ button will appear. Clicking this button will create a Journal Entry for the Exchange Rate Revaluation.
After submitting the Journal Entry, the general ledger will be updated accordingly.
Automatic Method: Navigate to the Company menu, go to the Accounts tab, find the setting named ‘Auto Create Exchange Rate Revaluation’, set its frequency, and save
Conclusion
The Multi-Currency Accounting feature in ERPNext brings significant benefits to companies conducting international transactions in this era of globalization. It provides solutions to the challenges of managing transactions with international clients. With this feature, companies can manage foreign exchange gains or losses more effectively, ensure the accuracy of financial statements, and support smooth international business operations. Thus, Multi-Currency Accounting is not just a technical feature in ERPNext, but also a strategic tool that enables companies to compete in the global market more effectively and efficiently.