Multi Currency Accounting
The Chart of Accounts (COA) is the foundation of your entire accounting system in ERPNext. It establishes the classification and reporting guidelines for financial data. Assigning the appropriate currency to each account in your Chart of Accounts that will handle international transactions is the first step in enabling multi-currency accounting.
You can choose the currency in which a new account will function when you create it, such as a bank account in USD or a customer's receivable account in EUR. The "Currency" field on the Account form is used for this. By setting this currency, ERPNext is informed that all balances for that account will be kept in the same currency and that any transactions involving this account must be made in that particular currency.
For instance, you would go to the Chart of Accounts, create a new account under Bank Accounts, and set its currency to USD if you wanted to open a USD bank account for international payments. ERPNext will then display the account's balance in USD, even if your company's primary currency is PKR, INR, or another one. From that point on, only USD transactions can be made against that account.
For multinational corporations that have operations in several locations, this configuration is especially crucial. It enables businesses to accurately manage exchange rate fluctuations, keep track of balances in each currency, and produce financial reports that comply with regulations.
1. Setup
1.1. Set Currency In Chart Of Accounts
You must assign a specific currency for every account when you create it in the Chart of Accounts in order to start using multi-currency accounting in ERPNext. The denomination in which transactions for that account will be tracked and reported is indicated by this currency. To ensure that all entries and balances for a USD bank account are kept in dollars.
For instance: You must set the currency to USD when creating the account. Since the system will not permit currency changes after transactions, it is crucial to set the correct currency before beginning any transactions.
1.2. New Account With Different Currency
You can open that particular account record in ERPNext and assign the desired currency if you already have an account and need it to handle transactions in a different currency. By doing this, you can change the currency without having to start over with a new account. For instance, you can edit an existing bank or receivable account and choose EUR in the "Currency" field if you would like it to function in EUR rather than the default currency of your business.
To ensure data accuracy, ERPNext will limit currency modifications once accounting entries are in place, so this change must be made before any transactions are recorded against the account.
1.3. Currency For Customer/Supplier
Each customer or supplier can have a billing currency assigned to them in ERPNext's party records. This is the currency that you and the other party will use for payments and invoices. You must also set a Default Receivable (for customers) or Payable Account (for suppliers) in the same foreign currency if the billing currency of the customer or supplier differs from the base currency of your business.
This guarantees that the right currency is used for all accounting entries pertaining to that party. To prevent discrepancies in your financial data, ERPNext will limit or block transactions if the currency of the account and the party does not match.
1.4. After Setup
You can start multi-currency transactions in ERPNext once you've assigned the appropriate currencies to the relevant accounts and party records (Customer/Supplier). ERPNext will prevent you from using a different currency for transactions involving that party, though, if the party's account currency is different from the base currency of your business. You must match the party's currency with the transaction currency (in sales or purchase orders/invoices) in order to continue.
ERPNext offers you greater flexibility if the party's account currency and the company currency are the same. You can conduct business in any currency, but the actual accounting entries (GL Entries) will still be recorded in the party's designated currency. Accurate tracking and reporting are thus guaranteed.
Additionally, it's crucial to confirm that the currency assigned to the "Debit To" or "Credit To" account chosen for billing or payments matches the party's account.
ERPNext locks the currency field after a transaction has been posted against a Party or Account, preventing additional modifications to prevent problems with data integrity. To ensure uniformity in reporting and transaction processing, a party's accounting currency must also be the same for every company in the system when there are multiple companies.
2. Exchange Rates
Maintaining precise exchange rates is crucial when working with multiple currencies in ERPNext in order to convert international transactions into the base currency of your business. You can manually record and manage exchange rate quotes between various currencies using the Currency Exchange page that ERPNext offers. This configuration guarantees accurate conversion and report reflection for all financial transactions involving foreign currencies.
ERPNext uses a methodical process to decide which exchange rate to apply when conducting a foreign exchange transaction:
1. User-defined Currency Exchange: Initially, the system searches the Currency Exchange records that users have manually entered for a comparable exchange rate. ERPNext converts using a record if one is available for the chosen currencies and date.
2. Auto-fetch from Online Service: ERPNext attempts to retrieve the current market rate from an online source if no manual entry is discovered.
3. Manual Entry As a Fallback: As a backup, the user must manually enter the exchange rate into the transaction form in the event that neither of the aforementioned methods works (for example, because of missing data or connectivity problems).
Additionally, "Allow Stale Exchange Rate" is a setting in the Accounts Settings. If enabled, this enables ERPNext to use previous exchange rates in the event that a rate for the current date is not available. When recent rates haven't been updated yet, this helps prevent transaction processing hiccups.
3. Transactions
3.1. Sales Invoice
If the customer's accounting currency is different from the company's base currency, the transaction currency must match when creating a sales invoice in ERPNext with a multi-currency setup. You are free to select any transaction currency as long as the customer's currency and the company currency are the same. ERPNext automatically retrieves the Receivable Account from the Customer or Company master when a customer is selected; this account needs to be configured in the customer's currency.
The invoice is now more in line with the expectations of the parties since the "Paid Amount" and "Write Off Amount" are entered in the transaction currency instead of the company's currency when it is created. For consistency, the Outstanding Amount and any Advance Amount will be computed and shown in the customer's currency.
ERPNext will ensure that the invoice and payment reconciliation is accurate and simple, even when the currencies are different, by reflecting the paid amount in the party's currency when you create a Payment Entry later.
3.2. Purchase Invoice
Although it pertains to suppliers, the reasoning behind a purchase invoice is comparable to that of a sales invoice. ERPNext uses the accounting currency of the supplier to make accounting entries. The system makes sure that all computations, including the Outstanding Amount, Advance Amount, and Write Off Amount, are performed in the Supplier's currency if that currency differs from your company's. The Write Off Amount is entered in the transaction currency, just like in sales invoices, to make sure all the numbers match the supplier's records and expectations.
3.3. Journal Entry
Enabling the "Multi Currency" checkbox in ERPNext allows you to manually create multi-currency accounting entries through a Journal Entry. You can choose accounts that are set in currencies other than the company's base currency once this option is checked in ERPNext.
ERPNext automatically displays the currency of the foreign currency account you select in the Journal Entry, pulls in the current exchange rate, and computes the corresponding Debit/Credit values in both the foreign currency and your company currency. If necessary, you can also manually change the exchange rate. ERPNext will convert the amounts you enter in the account's currency and enter them appropriately in the company's books, ensuring accurate financial statements in a variety of currencies.
4. Reports
4.1. General Ledger
ERPNext's General Ledger offers a comprehensive overview of every accounting entry for a specific account. When using multi-currency accounting, the debit and credit amounts will be displayed in the currency of the account rather than the company currency if you filter the General Ledger report by a specific account that is maintained in a foreign currency (that is, one that differs from the base currency of your business). This makes it simpler to confirm amounts as they appear in that currency without requiring manual conversions, enabling accurate review and reconciliation of international transactions.
This currency-specific view helps you track and match transactions exactly as they happen in that foreign currency, which is particularly helpful for accounts like foreign bank accounts or receivables/payables from foreign parties.
4.2. Receivables and Payables
ERPNext displays all amounts (such as outstanding balances, advances, and ageing information) in the Party or Account's currency in the Accounts Receivable (AR) and Accounts Payable (AP) reports. In the event that your supplier or customer is set up to use a foreign currency, the report will show their unpaid invoices and payments in that particular currency instead of converting everything to company currency.
Since their balances and statements are displayed in the currency they actually use, this improves transparency in financial tracking and streamlines communications with overseas clients and vendors. Additionally, it helps with currency exposure management, precise follow-ups, and cross-border reconciliation.