Adjusting Foreign Currency Accounts in Home Currency (Year-End)

Overview

When working with foreign currency transactions, the value of those transactions in your home currency may change due to fluctuations in exchange rates.

At the end of the financial year, you may notice that the balance shown in the AR/AP Aging Report does not match the Balance Sheet balance for the same account.

This difference occurs because:

• Transactions were recorded using different exchange rates during the year
• The current exchange rate valuation is different from the rate used when transactions were originally posted

To resolve this difference, you must create a Home Currency Adjustment Journal Entry.

This adjustment:

• Updates only the home currency balance
• Leaves the foreign currency amount unchanged
• Records the difference in an Exchange Rate Gain/Loss account

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How to Identify the Problem

You may need to perform a Home Currency Adjustment if you notice the following:

Scenario 1: AR Aging Balance Does Not Match Balance Sheet

For example:

Report	Amount
AR Aging Balance	$105,000
Balance Sheet AR	$100,000

In this case, the system shows a difference caused by exchange rate fluctuations.

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Scenario 2: AP Aging Balance Does Not Match Balance Sheet

Similarly, if the AP Aging balance differs from the Balance Sheet, the difference is usually due to exchange rate variations over time.

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Why This Happens

Foreign currency transactions store two values:

• Foreign Currency Amount (for example EUR, GBP, CAD)
• Home Currency Amount (converted using the exchange rate)

Over time, exchange rates change, which causes the home currency value of the same foreign balance to change.

Year-end adjustments are required so that financial reports reflect the correct home currency valuation.

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Solution: Create a Home Currency Adjustment Journal Entry

To correct the difference, you need to create a Journal Entry with Home Currency Adjustment enabled.

This adjustment recalculates the home currency value of the foreign currency balance.

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How to Create the Adjustment

Step 1: Create a Journal Entry

Navigate to:

Accounting → Journal Entries

Click Create New Journal Entry.

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Step 2: Enable Home Currency Adjustment

Enable the option:

Home Currency Adjustment

When this option is enabled:

• The Foreign Currency amount remains unchanged
• Only the Home Currency value is adjusted
• The Foreign Amount field will appear as 0 in the transaction view

This indicates that the entry is adjusting valuation only, not the actual foreign balance.

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Step 3: Select the Account to Adjust

Select the foreign currency account that needs adjustment, such as:

• Accounts Receivable
• Accounts Payable

Enter the adjustment amount based on the difference identified.

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Step 4: Post the Offset Entry

The difference caused by the exchange rate must be posted to an Exchange Rate Gain/Loss account.

This account records the financial impact of currency fluctuations.

If adjustments are being made in a client instance, always confirm with the client which Home Currency Adjustment or Exchange Gain/Loss account should be used before posting the entry.

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How to Decide Debit or Credit

The entry depends on whether the Aging balance is higher or lower than the Balance Sheet balance.

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AR Adjustment Logic

Case 1: AR Aging Balance Is Higher Than Balance Sheet

If:

AR Aging Balance > Balance Sheet Balance

Create the entry:

Account	Debit	Credit
Accounts Receivable	✓
Exchange Rate Gain/Loss Account		✓

This increases the home currency value of AR.

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Case 2: AR Aging Balance Is Lower Than Balance Sheet

If:

AR Aging Balance < Balance Sheet Balance

Create the entry:

Account	Debit	Credit
Exchange Rate Gain/Loss Account	✓
Accounts Receivable		✓

This reduces the home currency value of AR.

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AP Adjustment Logic

The same rule applies to Accounts Payable.

Compare the AP Aging balance with the Balance Sheet balance.

Condition	Entry
AP Aging Balance Higher	Debit Adjustment Account, Credit AP
AP Aging Balance Lower	Debit AP, Credit Adjustment Account

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Example

Assume the following:

Foreign Receivable Balance: 10,000 EUR

Exchange Rate	Home Currency Value
Original Rate (1.10)	$11,000
Current Rate (1.15)	$11,500

Difference: $500

Adjustment Entry:

Account	Debit	Credit
Accounts Receivable	$500
Exchange Rate Gain/Loss		$500

The foreign amount remains 10,000 EUR.

Only the home currency value is adjusted.

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Key Points to Remember

• Home Currency Adjustment does not change foreign currency balances.
• Only the home currency value is updated.
• All Journal Entry lines must use the same currency.
• Exchange rates in Journal Entries can be edited when needed.
• Differences should normally be posted to the Exchange Rate Gain/Loss account.

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Summary

If you notice that your AR or AP Aging report does not match the Balance Sheet, the difference is typically caused by exchange rate changes.

Creating a Home Currency Adjustment Journal Entry allows you to:

• Correct the home currency valuation
• Keep the foreign currency balance intact
• Record the difference in an Exchange Rate Gain/Loss account

This ensures that your financial statements accurately reflect current exchange rates at year-end.