James asked:

My balance sheet report is not converting foreign accounts at a reasonable exchange rate ... how does Quickbooks convert foreign accounts for balance sheet presentation? This is most prevalent with bank accounts.

Chris Bain answered:

There is an exchange rate assigned to every foreign transaction recorded in QuickBooks. When producing reports, QuickBooks uses this exchange rate to convert the amount to home currency (usually Canadian currency). When deposits and withdrawals are recorded in QuickBooks, they don't always have the same exchange rates. Because of this, you may find that the Home Currency balance does not match the foreign balance. You would need to correct this with a Home Currency Adjustment. This is a journal entry that affects only the Home Currency balance for an account.

Account balances are the sum of a series of transactions, each of which happen at a unique exchange rate. That means that the average exchange rate for the account changes over time but doesn't really bear any resemblance to the "correct" exchange rate on the day that you create the balance sheet report. That's why doing the home currency adjustment is important -- it revalues the account to the right amount on the day you create the report and applies the difference to the exchange gain/loss account.

Step by step:

1. Using your bank's Web site, find out how much your foreign-currency account is worth today in Canadian dollars.

2. In QuickBooks, create a balance sheet report and find out what QuickBooks says your foreign-currency account is worth in Canadian dollars.

3. Calculate the difference.

4. Go to the Make General Journal Entries window.

5. Choose the foreign-currency account on the first line. Enter the difference in the Debit column if your account should be worth more than QuickBooks says it is. Or, if your account should be worth less than QuickBooks says it is, enter the difference in the Credit column. Always enter a positive number.

6. On the second line, choose the Exchange Gain Loss expense account. QuickBooks will automatically balance the debits / credits for you (i.e. the amount will appear again in the opposite column from the one you used in Step 5).

7. Tick the Home Currency Adjustment checkbox at the bottom of the window and click OK at the information message.

8. Click Save & Close.

9. Create a new balance sheet. The foreign-currency account should now be worth the correct amount. Note that the actual foreign-currency balance of your bank account does not change (i.e. if you had $100 USD in QuickBooks before the adjustment, you will still have $100 USD afterwards) but now the value of that $100 USD is correct in Canadian dollars on your balance sheet.

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