Foreign exchange for bookkeeping

[Gretel]

I am dealing with a client from Switzerland and this is a foreign business account. The Swiss Franc hovered around a 1:1 all year, with small ups & downs throughout the year. Ending bank balance on 12/31/16 is about 2,000 Franc - exchange rate .980969 - $1,962.

All transactions were posted 1:1 and in my simple mind I believe this is OK. Exchange differences would create expenses/income anyway and all we have to do is a transaction to adjust the year end balance. Is this correct?

[Burke]

I always get the monthly exchange rate for the year, total them up, and then divide by twelve for the average rate.
This works well for equal payments (i.e, salaries/pensions) and in the case of cash if the bank account balance is roughly the same each month. Or you can use the same procedure to get an average bank balance.

[Nashville]

Taxable Gain or Loss

Gretel, any transaction subject to a foreign exchange at the time of the transaction gives rise to taxable gain/loss (classified as "other income" or "other expense". )

For example, using Burke's suggestion, record all transactions at an "average" rate of, let's say 1.05, leaving 2,000 francs in the bank. If the rate at the end of the year is 0.98, this translates to $1960 dollars. 2000 X 1.05 should leave a US dollar balance of $2100 USD. Now you have only $1960 dollars. You can book a loss of $140.00 and deduct it.

[Gretel]

Thanks, at the bottom line, I believe we get the same result. Just let's assume that on 12/31. the rate was exactly 1:1 but throughout the year it fluctuated being somewhat below and somewhat above the year end rate. All year I look up the correct exchange rate, do the math, ONLY to adjust at year-end because my balance will show a little difference. I understand you would not want to do this for higher dollar amounts/fluctuation in exchange rate. But in my case, what is the harm. Am I missing something.

[Gretel]

Website for exchange rate - Burke

Which website do you use, Burke? Somehow I thought (related to the filing of form 8938 for another client) I had to use the Treasury website for the exchange rate but they seem to have the quarterly rates only. I like X-Rates website. If I have frequent transactions, don't I need to use daily rates?

[Burke]

I use X-RATES.