This example is prompted by the need to: 1) Handle accounting in one currency (EUR), pay bills, receive rent, etc. 2) Make investments from one currency (USD) to the other (EUR) 3) Pay taxes on profits (if any) in USD.
The Chicken Farm example shows two methods of getting the necessary view for paying taxes (item 3 above). I think the 2nd method, even though it requires more computation to generate the USD view, is more correct. Any comments? ===================================== If you take for example, an investment of $100,000 USD in a French chicken farm. If the exchange rate from USD to EUR is 0.7300, then a naive Accounting would show: USD Cash Account Debit Credit Chicken Farm Purchase 100,000.00 EUR Bank Account Debit Credit Chicken Farm Purchase 73,000.00 ============================================ What I would like to see are two views or planes, one USD denominated and the other EUR denominated. If you make the investment in the French chicken farm, the $100,000 goes through a tunnel between the USD world and the EUR world. In this tunnel, it is multiplied by the exchange rate (directionally) and perhaps even an exchange fee is deducted. This exchange fee goes into an expense account as shown below. At moment 1, you have $100,000 in your pocket and no French chicken farm. A view (to be defined later) in the USD world shows the $100,000 in the pocket and 0 USD in French chicken farm equity. If you make the transaction, with the exchange rate of 0.73 and a 1% transaction fee taken out of the USD amount, at the end of the transaction, you would see on the Dollar side, an expense of $1,000 and an equity of $99,000 in the French chicken farm. [This is not a reversible transaction, the $1,000 transaction fee is gone. Also, if you try to reverse it, the exchange rate going the other way will be different (and probably a money losing one as well)]. On the French side, the chicken farmer got 0.73 * 99,000 = 72,270 EUR. A French manager of the chicken farm would see an equity investment of 72,270 EUR and a foreign exchange expense of $1,000 * 0.73 = 730 EUR. Some time later, the French manager sells 1000 chickens that originally cost 1 EUR for 2 EUR. The chicken feed during that same period, for those chickens was 0.20 each. (As a side piece of data, the USD to EUR exchange rate is 0.71 at the time the chicken sale was made and the average exchange rate during the period the chicken feed was purchased was 0.72 ) Some time later, the American entrepreneur needs to file taxes and she calls up accounting statements: In Euros, the balance sheet looks like: Equity 72,270 EUR ------------------- Revenue 2000 EUR Feed cost 200 EUR FX Cost 730 EUR ------------------ Profit = 1070 EUR Converting this back into USD for the tax report, one can use the conversion rate at the end of the accounting period to get a VIEW of the books in USD. We are actually not transferring any euros back into dollars, but just viewing the books through the foreign exchange multiplier(s). We can construct this view in two ways - We could multiply all of the transactions by the FX rate that existed at the time of the transaction, or we could multiply everything by the exchange rate existing at the moment of the accounting view construction. If the exchange rate at the moment the accounting view was constructed is 0.70 euros = $1.00 or 1.00 euros = $1.42857 Using this later interpretation, we would have: Equity 72,270 * 1.42857 = 103,242.75 USD ---------- Revenue 2,000 * 1.42857 = + 2,857.14 USD Feed cost 200 * 1.42857 = - 285.71 USD FX Cost 730 * 1.42857 = - 1,042.86 USD ------ Profit 1,070 * 1.42857 = + 1,528.57 USD =================================== If we choose to do the multiplication using exchange rates available at the moment of the transaction, then we would have: Equity 72,270 * 1.36986 = 99,000 USD ---------- Revenue 2,000 * 1.40845 = + 2,816.90 USD Feed cost 200 * 1.38889 = - 277.78 USD FX Cost 730 * 1.36986 = - 1,000.00 USD ----------------------------------- summ --- Profit = + 1,539.12 USD ========= These 'views' are 'reversible' in the sense that no actual money has been lost or expensed in creating the views. Once you have made the choice of internal method, a click of a button will do the calculation of a new view in another currency. (If the 'by transaction' FX conversion method is used, this assumes a database supplying FX numbers over the date range of transactions - this you have already) I would guess that most multi-national companies do their calculations in much the same way. Maybe this view is one reason for the success of SAP as a provider of bookkeeping/accounting systems. ======= Best regards Bob G ------------------------------------------------------------------------- SF.Net email is sponsored by: The Future of Linux Business White Paper from Novell. From the desktop to the data center, Linux is going mainstream. Let it simplify your IT future. http://altfarm.mediaplex.com/ad/ck/8857-50307-18918-4 _______________________________________________ Ledger-smb-devel mailing list [email protected] https://lists.sourceforge.net/lists/listinfo/ledger-smb-devel
