At any point in time, the current balance of a foreign currency bank account is shown in both the nominated foreign currency and the home currency.
The relationship (calculated exchange rate) between the two balances is not dictated by spot rate, or affected by revaluation sessions. It is a calculated exchange rate.
This rate shows as the exchange rate against the currency bank balance in the Revaluation Session.
Explanation
The current balance in foreign currency is calculated by adding up all cheque (-) and deposit (+) transactions to arrive at a total foreign currency figure. Then, for each transaction made from the foreign currency bank account, Jim2 has recorded the equivalent value of the transaction in the home currency – dictated by the calculated exchange rate at the time the transaction occurred. The calculated exchange rate represents an apportioned rate, directly related to the value of transactions and the exchange rate they occurred at.
It is important to understand the different roles of an exchange rate and a calculated exchange rate in a foreign currency bank account:
▪The Exchange Rate dictates exactly the amount of home currency used in a foreign currency transaction.
▪The Calculated Exchange Rate shows an apportioned average of the exchange rates used in all the account transactions at that point in time.
Example:
Transaction in USD |
Spot Rate on Transaction |
AUD Recorded in FC Bank Account |
|---|---|---|
$100 |
0.8333 |
$120.00 |
$100 |
0.6999 |
$143.00 |
$100 |
0.7692 |
$130.00 |
Total: USD300 |
Total: AUD393 |
|
Foreign Currency Bank Account Calculated Exchange Rate = 0.7633 (total USD divided by total AUD) |
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Because the value (balance) of the foreign currency bank accounts is affected by currency rate changes, it is good practice to revalue that balance periodically. The Revaluation Session will include each current foreign currency bank account balance only.
Whereas unpaid transactions such as creditor purchases will be revalued against the very specific exchange rate they were recorded at, foreign currency bank accounts will be revalued against their current calculated exchange rate.
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Where a foreign currency bank balance goes below $0.00 balance, eg. the bank account is in overdraft, Jim2 will use the current spot exchange rate on that transaction. |
Further information