QuickBooks Desktop: Your Home Currency Adjustment Super Trick

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If you work with multi-currency users of QuickBooks, you more than likely have had a client call you in a panic about a foreign bank account they closed out.

Despite the fact that the balance in a closed bank account is obviously zero (in any currency), a non-zero home currency balance (either positive or negative) appears for that account on their QuickBooks Balance Sheet.

Remember, the Balance Sheet is a summary type of report and all balances are reported in the home currency, in this case, U.S. dollars.

Because you’ve trained them well, they figure out they need to use the Home Currency Adjustment function, because the problem has to do with fluctuating exchange rates over time. But when they open the Home Currency Adjustment screen and specify the currency of that bank account, that closed bank account doesn’t appear.

Why?

Well, I have the answer – and a very simple workaround.

First, let me explain how a zero balance foreign bank account with a non-zero home currency value can happen. It’s surprisingly easy.

Let's look a very simple example of a multi-currency environment. You open a new foreign currency bank account. I’m partial to all things Canadian (gee, I wonder why), so let’s call it a Canadian Bank Account.

In this example you opened a Canadian Bank Account on Dec. 31, 2015, with $10,000 CAD:

At the rate of exchange on that day, the balance sheet showed a home currency value of $7,220 (USD), because the Canadian dollar was worth $0.7225 U.S. on that date, and that was the exchange rate used on the transaction:

In this super simple example, there were no bank charges or other transactions. In fact, I did nothing with this bank account during the entire next year, until I decided on Dec. 31, 2016, that it wasn’t worth keeping and I transferred the $10,000 Canadian out and put it into the U.S. bank account.

But the exchange rate had changed by then, as exchange rates do. In fact, the Canadian dollar was worth $0.7448 (USD), according to the U.S. bank account to which I transferred the funds on Dec. 31, 2016. That’s how much they would give me for it in the U.S. bank account, and so that was the exchange rate I used on this second transaction.

So, this transaction reduced the Canadian Bank Account’s balance by $10,000 (CAD), or $7,448 (USD).

Do you see what happened?

On Dec. 31, 2015, the CAD bank’s register showed $10,000 (CAD), but the home currency value on the balance sheet was $7,225 (USD).

After the account was closed on Dec. 31, 2016, the CAD bank’s register showed $0.00 CAD, but the home currency value of that Canadian Bank Account on the Balance Sheet was  -223 (USD) ($7,225.00 less $7,448.00).

So, that’s how a zero balance in a foreign currency can yield a non-zero balance on the balance sheet.

I used a very simple example with only two transactions. You can imagine how a real company with multiple transactions in foreign currencies over time at different rates of exchange can get messed up.

My client realized that somehow the fluctuating exchange rates were the culprit, so they attempted to create a Home Currency Adjustment by selecting Company > Manage Currency > Home Currency Adjustment.

They specified the valuation date (Dec. 31, 2016) and the currency (Canadian dollar). They even entered an agreed-upon exchange rate for this date: 0.7448. They were looking to enter $0.00 in the Balance (USD) column.

But when they hit Calculate Adjustment, the Canadian Bank Account didn’t appear. In fact, in this simple example, because there were no other Canadian balances, so they saw this message:

But, why?

The answer is simple. When the Home Currency Adjustment window is launched, it looks for non-zero foreign balances to revalue. Think of all the foreign bank accounts, credit cards and, more importantly, customers and vendors for each currency it would have to go through in calculating the amount of the HCA in a normal company file. The developers obviously decided to minimize the computing power required by telling QuickBooks to ignore zero foreign balances.

So, QuickBooks ignores any foreign balances that are zero, such as the Canadian Bank Account in my simple example above, when it is about to create a Home Currency Adjustment revaluation transaction.

But I have a workaround. If you’ve ever created a Home Currency Adjustment in the conventional way, you could see that, behind the scenes, it created a very specific type of General Journal Entry. It’s one in which the debits or credits affected the foreign accounts (even multiple A/R customers and A/P vendors in one transaction, normally not possible in QuickBooks Desktop). The flip side affected the Exchange Gain or Loss account and the Home Currency Adjustment box in the header section of the entry was automatically checked.

This resulted in the number of foreign monetary units being unchanged (so reconciliations in that currency were unaffected), but their home currency value was changed, booked to Exchange Gain or Loss.

So, my workaround is to open up a General Journal Entry, and leave the Currency and Exchange Rate fields untouched. (The Exchange Rate is irrelevant in this case anyway.) I check the Home Currency Adjustment box myself, enter the valuation date (December 31, 2016 in this case), specify the foreign bank account (the Canadian Bank Account in my example) and the amount of the value adjustment (debit of $223 in this case to zero out the value), and on the second line, specify the Exchange Gain or Loss account and balance the entry (credit $223 in this case).

After doing this, the Canadian Bank Account’s balance in Canadian dollars is still $0.00, but its home currency value now also is correct at $0.00 (US). The Canadian Bank Account has disappeared from the Balance Sheet, and the $223 in Exchange Gain or Loss credit resulted in $223 in Net Income for the year:

This General Journal Entry trick is useful whenever you close or zero out the balance on a foreign bank or credit card account.

Keep in mind that you should be instructing your clients to create Home Currency Adjustments in the conventional way more often than they probably do anyway. After all, you can see how home currency values of foreign amounts can get out of whack quite easily.

This is trick is very valuable, and only few people know it… so shhhh!.. Don’t tell anyone.