How to fix: A foreign balance is correct, but the CAD balance is incorrect
Sometimes, in the course of a year the foreign transactions and currency exchanges go "mad" and we end up with a situation where our CAD balance does not represent the reality of the Foreign balance.
Here's a situation and how to fix that.
CAD balance is $500.00 (incorrect)
USD balance is $1000.00
Correct CAD amount is $1100.00
Based on the above assumptions, our current CAD balance is too low (below are procedures for both too low or too high balance).
In order to rectify the issue and get the correct home currency balance (CAD) back, you will have to follow the procedures below:
1. Find the difference between the correct balance and the current balance in CAD. In our example, it is $1100.00 - $500.00, which is $600.00.
2. Create a general journal entry, select USD in the Currency drop down box, so USD bank account can be selected.
3. Make the 1st adjustment journal entry:
i. When the current CAD balance is too low, we will debit the USD account by $1 and credit the exchange and rounding account by $1.
ii. When the current CAD balance is too high, we will do the opposite by crediting the USD account by $1 and debiting the exchange and rounding account by $1.
4. Put the difference calculated from Step 1 (600) plus 1, which is 601, to the Exchange Rate box.
5. Post the entry. It will debit $1.00 USD, which is equivalent to $601.00 CAD, to the USD account and credit the same amount to the exchange and rounding account. By looking at the USD bank account now, it will have a CAD balance of $1101.00 and USD balance of $1001.00.
6. Make the 2nd adjustment journal entry to remove the extra $1.00 dollar in both currencies created by Step 5. Credit USD account and debit the exchange and rounding account by $1.00 using the exchange rate of 1.
The USD account will now have a CAD balance of $1100.00 and USD balance of $1000.00.
A friendly reminder is that if you post a large amount to the exchange and rounding account after adjustment, it may distort the income statement for the year. If this is the case, you will need to consult your accountant for adjusting this amount to prior years.
Try it! You will see it works, enjoy! :-)