Local Supervision of the Foreign Branch
A question which enters into the accounting with foreign branches arises in connection with the law of the land in which the branch is opened. “Most foreign countries have some regulations as to what books must be kept, and the manner of recording the transactions. In France, for instance, the law requires that a summary of all transactions shall be entered through the journal, which therefore becomes the posting medium for every transaction. This book has, in the first instance, to be produced to a public official, who examines it to see that it is duly paged, none missing, etc., and then stamps it as correct, and anything requiring legal proceedings in which accounts are concerned must be proved from the journals with the official visa.”
“Since the work of organizing and installing systems of accounting in branch houses abroad is of undoubted and growing importance, it is necessary to have not only a practical acquaintance with the currencies in which the foreign books are kept, and the laws of the land in regard to the kind of books which must be kept, but in addition a thorough knowledge of the manner in which transactions are to be transmitted periodically to the home office, and of their assimilation with the home accounts and the drafting of the final accounts, balance sheets and profit and loss statements becomes indispensable.”
The Foreign Sales Agency
Where the foreign branch is merely a selling agency for the home office, and invoices must be made out at the home office in foreign currency, a convenient way to handle these accounts is to keep a separate set of records for each foreign currency. A foreign sales journal, customers ledger, and cash receipts journal, together with foreign notes receivable and sales returns and allowances journals, where necessary, will comprise all books of original entry needed to secure sources for postings to the customers’ individual accounts in terms of foreign money. In this way all charges for goods sent, and credits for returns, allowances, cash and notes received and discounts allowed, can be kept entirely in foreign currency.
Method of Conversion of Results
Periodically—say, once a month—the total transactions for the month must be converted into home currency and brought into the general ledger. In normal times a fixed average rate of exchange based on past experience gives sufficiently accurate results, saves many tedious calculations and much unnecessary work. At certain times and in certain businesses the prevailing rate of exchange on the actual day, or the monthly average of daily rates, may need to be used to secure satisfactory results. With the use of the fixed average rate, as above, the totals of foreign sales and sales returns journals are converted into home currency and carried respectively as debits and credits to Accounts Receivable control, and credits and debits to Sales. The total of the discount column of the cash receipts journal is converted, at the average rate, and charged to Sales Discount and credited to Accounts Receivable control.
The conversion of the cash received must be handled differently, however. The actual rate at which the foreign draft or bill received in payment of the customer’s account is converted by sale to the banker—and so credited to the home office bank account—almost always differs from the average rate at which the item was charged to the customers’ controlling account. This, of course, makes no difference with his individual account which is kept in foreign currency, but does make necessary an adjustment of the general ledger Accounts Receivable control in order to make it agree with the foreign customers ledger when converted at the average rate.
Accordingly, in the general cash book two additional columns are provided, viz.: Profit on Exchange and Loss on Exchange columns, which are used somewhat as is the Sales Discount column. Every foreign draft or bill when received is entered, in foreign currency, in the foreign cash book and posted from there to the credit of the customer. When that draft or bill is sold at the bank (it may be held for some time after receipt for a favorable turn of the money market) and so converted into home currency, it is entered in the Accounts Receivable column at a figure representing conversion at the fixed average rate. The difference between this figure and the actual amount received at the bank is entered in either the Profit on Exchange or Loss on Exchange column as the case may be, with extension of the actual amount into the bank column as a charge to the bank account. Thus, the total of the Accounts Receivable column when posted to the general ledger Accounts Receivable control adjusts that account so that it controls the foreign customers ledger converted at the average rate. The totals of the Profit on Exchange and Loss on Exchange go as credits and debits respectively to the Profit and Loss on Exchange account.
The foreign sales agency often collects the accounts and remits total collections periodically by purchase of one bill or draft on its local bank for the total. There must, of course, accompany each such remittance a statement of the detailed receipts for proper credit to individual accounts. The general cash book will show only the total remittance, however. Regular agency accounts as explained in [Chapter XXX] will secure the control of the home office over the agency’s expenditures.