Hi, please can someone clarify the correct procedure to process the following scenario.
Purchase made from a company in China in US Dollers.
Company used to make payment to the company (Set up as Merchant Account)
Payment from GBP bank account to Merchant Account using their US Dollar exchange rate on the date the payment is made.
So here is how it works:
Company in China issue an invoice for $1000.
We use third party company in GBP (Merchant Account) to make the payment to the China Companys US Dollar bank account. The GBP figure we pay them is based on a currency exchange rate they set for that conversion, for example 1.25 USD to the GBP meaning we would send them £800 from our GBP bank account and they would use that to pay the China companies Dollar Account.
In Quickfile, we would raise an invoice against the China company in USD, so $1000. This is where the confusion comes. How does this invoice get paid down correctly, becasue when you create the ivoice it wants you to set an exchange rate.
How do you handle this correctly? Do you:
Use the same exchange rate that you was given by the third party company that sent the payment, so 1.25 and then tag the invoice to the third party Merchant Account so the account shows £800, then tag the £800 payment that was made from the GPB current to the third party company to the Merchant account to balance that out to 0 again?
Use the exchange rate set by quickfile (for example 1.111) for the USD invoice and then tag the invoice to the third party Merchant Account so the account shows £900, then tag the £800 payment that was made from the GPB current to the third party company to the Merchant account shown a balance of £100 credit.
If it is option 2, what do you then do with this £100 showing in the Merchant Account? becasue the Merchant Account does then not reflect the balance of the third party company since there is no balance in reality with them.
This also leave a “Currency Variation” on the USD invoice as well as the descrepency in the third party company merchant account.
Option 1 make more sense as surely the exchange rate that goes on a purchase invoice is going to be the rate that you got when you sent the GBP payment to that company, or in this case the third party company gave us.
I hope this all makes sense and someone can clarify the correct procedure.
Thank you.
But the merchant account for the third party company that converts and sends the GBP to the US bank account is in GBP and not USD. Are you saying the merchant account should be in USD? Not shue how that can be as we send them GBP and any balance with them if there were onew would be in GBP too.
Also there is a fee from the third party company that is included in the GBP we send them, so that is why the merchant account is in GBP.
If it was done the way you suggest then it would not balance becasue the conversion that is on the USD invoice tagged to the USD merchant account is different to the conversion rate that the third party company used when converting the GBP to USD, that is why surely it is better to process the invoice using the same conversion rate the third party company used and it all balances.
This then means you have 2 merchant accounts, one GPB and one USB for the one Wise account?
Also does this not create a currency variation on your USD invoice of a loss every time since the rate you get with wise will always be worse then the “real” exchange rate on the day that the invoice will auto use.
This then means you have 2 merchant accounts, one GPB and one USB for the one Wise account?
In the background of things, essentially all Wise are doing is accepting your GBP, probably in a GBP account, and the moving it to a USD account anyway.
But if you get rid of the GBP account and just have the USD one, it makes life difficult when trying to tag a GBP charge from a USD account.
You could split it at the GBP account, if you wish.
does this not create a currency variation on your USD invoice of a loss every time since the rate you get with wise will always be worse then the “real” exchange rate on the day that the invoice will auto use.
Not necessarily. They convert it and add a fee on top.
It may create a currency variation, and that’s to be expected. The date of the invoice isn’t necessarily the date of the payment, and even if it is, the exchange rate fluctuates constantly
If in doubt, you could always consult your accountant as they will give you a tailored solution.
(The QuickFile support are not registered accountants nor bookkeepers. We can only provide advice on how QuickFile works)
Thanks, I have tried setting it up just how you described with the two merchant account, one in GBP and one in USD and processed the invoice and fee like you said, and the USD invoice does not show and currency variation like I expected it to, it shows 0.00, and both the GPB merchant account and USD merchant account are showing a balance of 0. Does this sound all correct? I am sure there would be something somewhere but I don’t know where that would be shown if not on the invoice.
When you make a bank transfer between two accounts that are in different currencies that creates a hidden currency variation loss or gain in the sense that the underlying GBP balance-sheet-balance of the foreign currency account drifts away from the true value that you would get if you converted the foreign currency balance to GBP at the prevailing rate. There is an option on foreign currency bank accounts to correct for this by creating a special currency loss/gain journal that adjusts the GBP valuation of the bank account on your balance sheet without changing the foreign currency balance.
In this case I suspect that even though the USD merchant account shows a balance of zero in USD it will have a non-zero value on the balance sheet, and creating one of these special currency movement journals will crystallise the loss/gain.
Thank you for the info. What I don’t understand is why I can’t just create the USD invoice and put in the conversion rate I got from say the third part parents company like Wise or that a credit card gave me and then just tag the GBP payment made for the purchase to the invoice and as the rates match there would be no variations at all. Why should I show a loss for conversions when I lost nothing in reality.
For example: I purchase something for $100 on my UK credit card and the card company converts that and it works out £80 for that purchase. When I create the USD invoice for this purchase, why not just put the conversion rate in at 1.25, then make a payment on the invoice from that GBP credit card account for the £80 and the variation is 0. That makes perfect sense to me as that is the rate you got at the time of the transaction. Same method can be used for Wise conversions too as it is same as a credit card doing the conversion really, or am I missing something.
Basically what is the point or need to create the USD invoice using the default conversion rate that QuickTime sets when that is not the rate I converted at with the credit card company or wise or whatever. Then there is no variations and no messing about with additional USD merchant account and journals and such.
Having looked this up on HMRC it appears my method is correct and valid when processing a credit card transaction or using Wise or similar to do the conversion.
From HMRC
The company may record a transaction in its accounting records using the exchange rate shown in the relevant documentation. For example, if an employee on business in the USA uses a company credit card to make a purchase for $100, the credit card company will translate $100 into sterling at its own exchange rate. Companies will normally record the purchase at the sterling amount shown on the credit card statement, including any commission element.
Hi,
You can set the exchange rate. I have bought a couple of things in USD and was able to enter the GBP amount that left my bank account and the USD amount the US company charged me.
I can’t remember completely but I think it was on the invoice screen, when marking the USD invoice as paid or on the banking screen when tagging the payment to the invoice, there was an option to enter all these details.