What is accounting currency?

Accounting currency is important for a company’s official bookkeeping and may differ from the transactional currency used. Companies that have operations in multiple countries or subsidiaries operating in different geographic locations, use different currencies in their day-to-day operations, however, they need to convert their financial statements into the accounting currency in order to consolidate the financial statements.

Accounting currency is the monetary unit used to record financial transactions in a company’s accounting records. It is crucial for the company’s bookkeeping or general ledger maintenance. 

While learning about the accounting currency meaning, we should also keep in mind that it is not necessarily the same as the functional or transactional currency. For example, a company may be headquartered in the US, but operate majorly in Canada, so employees and customers would generally transact in Canadian dollars (CAD), especially in the case of sales. When the company is maintaining its financial records, it should convert the CAD to US dollars (USD) as it is the standard accounting currency. 

Accounting currency maintenance is important for large multinational companies that do business in many different countries, as the conversion rates keep changing constantly and the companies have to decide if they want to use the temporal or historical method, or the current-rate method. 

A company can choose its accounting currency, but it cannot change its functional currency, as doing operations in a foreign country with a different foreign currency may not be feasible. A company can choose from using either the temporal or current-rate method of currency translation.

• Temporal or historical method: Assets and liabilities are divided into monetary and non-monetary categories. Monetary assets are highly liquid such as cash, investments and accounts receivable, while liabilities due to be paid out in the short term, such as accounts payable and salaries payable, are considered monetary liabilities. The exchange-rate values for non-monetary assets and liabilities are converted by the rate based on the time those assets and liabilities were acquired or incurred.

• Current-rate method:  Assets and liabilities on the balance sheet are converted at the exchange rate as of the balance sheet date. However, this can create a higher translation risk, as the current-exchange rate may change drastically before the end of the accounting period.

An accounting currency example

Let’s consider an example to understand fully what is meant by accounting currency. 

Company XYZ has decided to present its financial statements in USD, but as company operations are heavily concentrated in the UK, its functional currency is British pound sterling (GBP). XYZ also has various subsidiaries across the globe that report in euros (EUR), Australian dollars (AUD) and Japanese yen (JPY). 

When XYZ’s subsidiaries and operations are preparing a consolidated report for its parent organisation, they have to do it in the accounting currency, which in this case is USD.

Accounting currency vs reporting currency

Now that we have accounting currency explained, let’s understand the difference between accounting currency and reporting currency. 

While accounting currency is commonly referred to as reporting currency, there is a significant difference between them. Accounting currency is what the legal entity or the headquarters chooses to use for calculating amounts or bookkeeping using a general ledger. It has to pick a unique currency as per the legal entity. 

Reporting currency is used for operational reporting to the government bodies. For example, if XYZ chooses to have GBP as an accounting currency, but is primarily based in the US, it has to use USD for reporting to government bodies.