For small business or e-commerce, you have to procure inventory. You may be required to do that from overseas. In that case, you need to pay in foreign currency. For example, your home currency is GBP and you collect your inventory from Italy. So, you need to make payments to your Italian suppliers by Euro. How do you handle this situation at the time of bookkeeping?
One of the easiest and convenient ways to handle foreign currency is using Wise ( Wise was Transferwise earlier). It’s a third party company that acts as an online money exchanger. You just need to register with that website, send money from your bank and wait. As they will do the rest. The question is what does Transferwise do?
Transferwise primarily just receives and disburses money to your suppliers. Obviously, they charge a small amount before sending money to suppliers.
Let’s get our hands dirty. Now we will process Transferwise as well as record in cloud accounting software like Xero or QuickBooks Online.
We will do all by steps’
Step 1:
Understanding the Transferwise statement
First, we need to understand the statement provided. From there, we will get all the information we require to processing, as well as bookkeeping. If you look at the statement you will see, it has some columns like these:
Id
Submit time
Profile
Status
Source currency
Amount paid by
Fee
Amount converted
Excess refund
Target currency
Converted and sent to
Exchange rate
Exchange Rate Date
Payout time
Name
Account details
Reference
We need some columns from them mostly. Some of them are….
Status
Source currency
Amount paid by
Fee
Amount converted
Target currency
Converted and sent to
Exchange Rate Date
Name
Reference
Step 2:
Create a TransferWise holding account COA
Holding account is very useful for handling a bit of a complex transactions in bookkeeping. We are going to use this trick to categorize transactions with TransferWise.
In our example presented above, home currency is GBP and the conversion currency is Euro.
We have to create a dummy bank account. As it’s not a real bank. And we also are not required to reconcile this dummy bank account either. We can’t create a normal Transferwise holding account as Xero doesn’t have facilities to transfer funds to any COA except bank accounts. So, you have to create a bank account with a Euro currency name ‘Transferwise Holding Account’.
Step 3:
Transfer bank deposit to holding account
Now it’s time to go to the bank panel and transfer the bank deposit to ‘Transferwise Holding Account’ (THA).
You will find Transferwise Holding Account on the screen if you select Transfer as we’re seeing above. Just select the Transferwise Holding Account. Now you will find a screen like this where you have to submit the total Euro amount of the GBP amount. As we are going to transfer Euro amounts to THA.
To get the total Euro amount, you have to go through your Transferwise statement. Below we see the statement where you have to divide ‘Converted and sent to’ divided by the amount converted to get ‘Exchange rate’. Then you have to multiply ’EUR’ by ‘Amount paid by’ to get the ‘Amount EUR’ shown in the bank feed. After getting the amount, you have to out that bank feed and reconcile. Now, if you go to Transferwise holding account history, then you will find the deposit amount just transferred from the bank.
Step 4
Record Overpayment
We have a bill from the relevant supplier ‘Cubo Design’ on 31 January 2020. As we paid that supplier on 6th January 2020. That means the payment was an overpayment. To record overpayment we have to use the “spend money” option. From there, we will make an overpayment of Euro 3000 to Cubo Design on January 6, 2020.
Now, if we visit the Transferwise holding account history panel, we will see that the total balance is decreased by the overpayment balance (Euro 3000).
Step 5
Record Spend for Transferwise Fee
To record Transferwise fees in Xero we again have to go through the money option. Here, we use the direct deposit option. That means we spend money directly from a Transferwise holding account. If we check Transferwise Holding /THC, then we will see that the balance is zero.
Step 6:
Credit Apply to the bill
It’s time to apply overpayment (credit) to the purchase bill.To do that, we will go to the right corner of the overpayment.
