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Is it Okay if I Receive an Invoice in Foreign Currency?
As a business owner, you might on occasion get invoices from international suppliers. So, is it okay if your invoice isn't in GBP? Yes, but you need to follow specific steps to keep your accounts accurate and compliant.
Converting Foreign Currency Invoices to GBP
For accounting and VAT purposes, you need to convert all transactions to GBP. This keeps your financial records consistent and compliant with HMRC requirements.
Accounting for Foreign Currency Expenses
To keep your books accurate, record expenses invoiced in foreign currencies properly. Here's how:
- Record the Expense in Your Accounting Software: Ensure your software can handle foreign currency transactions. Enter the expense details, including the foreign currency amount and the GBP amount from your bank statement.
- Include VAT Details (if VAT registered): If the invoice includes VAT, convert and record the VAT amount in GBP using the same exchange rate applied to the total expense amount.
- Keep Documentation: Keep copies of the original invoice, your bank statement, and any manual conversions. This is crucial for audits and HMRC compliance.
Using Invoicing Software for Foreign Currency Transactions
Modern accounting software can simplify managing foreign currency invoices. Here's how:
- Automated Conversion: When you input an expense in a foreign currency, the software automatically converts it to GBP using current exchange rates.
- Expense Tracking: Track your expenses effectively, even if they are in different currencies.
- Bank Reconciliation: Automatic reconciliation features match your recorded expenses with your bank transactions, ensuring accuracy.
Practical Example
Imagine you receive an invoice from a German supplier for €1,000. You paid this invoice using your UK business bank card.
- Check Your Bank Statement: Suppose your bank statement shows £880 was deducted to cover the €1,000 invoice.
- Record the Expense: Enter £880 as the expense in your accounting software.
- VAT Considerations: If the invoice includes VAT, convert and record the VAT amount in GBP using the same exchange rate.
Paper Bookkeeping
If you do your bookkeeping on paper, here's what to do:
- Compile All Invoices and Receipts: Gather all paper invoices and receipts, including those in foreign currencies.
- Convert Foreign Currency Invoices to GBP: Use the exchange rate at the time of the transaction to convert each foreign currency invoice to GBP.
- Record Transactions in a Ledger: Manually enter each transaction into your ledger or accounting books using the converted GBP amount.
- Reconcile Your Accounts: Regularly reconcile your ledger with your bank statements to ensure all transactions match and there are no discrepancies.
Using Spreadsheets for Invoicing and Calculating Exchange Rates
If you use spreadsheets, here's a simple way to handle exchange rates:
- Input Invoice Details: Enter the date, foreign currency amount, and transaction description.
- Add Exchange Rate Column: Enter the exchange rate used for conversion.
- Calculate GBP Amount: Use a formula to convert the foreign currency amount to GBP.
- Record the GBP Amount: Ensure the converted GBP amount is accurately recorded.
Difference between a currency-converted invoice and the bank transaction:
Sometimes between converting an invoice to GBP and the amount that amount that has exited the bank are different amounts. This is due to currency exchanges changing 24/7 and the amount of time between receiving the invoice, entering onto your software and when the transaction leaves your account there has been a change in exchange rates. This amount of money then goes on to the exchange rate category on your profit and loss, see example below.
Example
You received an invoice for €1,000 on January 10th and paid it on February 15th.
- Invoice Entry: Record the invoice details.
- Date: January 10th
- Amount: €1,000
- Exchange rate on invoice date: 0.87
- Expected payment of £870 (€1,000 * 0.87 = £870).
- Payment date
- Date Paid: February 15th
- Suppose the rate is 0.85 on the day of payment
- Amount paid £850 (€1,000 * 0.85 = £850)
- Payment difference
- The £20 is known as an exchange rate difference and can happen either way (you pay more than you were expecting or you pay less than you were expecting). In both circumstances, the difference goes to the exchange rate category on your profit and loss.
Ensuring Compliance and Accuracy
- Documentation: Keep all original invoices and receipts.
- Reconciliation: Regularly reconcile your bank transactions.
- Review: At the end of the financial year, review your records to ensure all foreign currency transactions are accurately converted and recorded.
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