Anna Šendik, Chief Accountant at Kidnes OÜ, advises that if a company pays an invoice in cryptocurrency or receives payment in cryptocurrency, it is important to record such a transaction in both currencies in the accounts to ensure accurate financial reporting and to comply with tax legislation
Cryptocurrencies and related transactions, including exchanges and payments in cryptocurrencies, are becoming increasingly popular. Five years ago, cryptocurrencies were only talked about in a few and narrow circles in Estonia, but now they are on the agenda almost everywhere.
In this article, Anna Šendik, partner and chief accountant atKidnes OÜ, who specialises in cryptocurrencies, shares her tips on how the initial document should be drawn up when paying bills in cryptocurrencies.
How to prepare an invoice paid in cryptocurrency?
The primary document in accounting plays a key role in recording an economic transaction. Although cryptocurrencies are digital assets, they must be recorded in the same way as traditional assets. What does this mean?
It means that the amount of the transaction must be recorded in both the cryptocurrency and the national currency. If a company pays an invoice in cryptocurrency or receives a payment in cryptocurrency, it is important to account for such a transaction in both currencies to ensure accurate financial reporting and to comply with tax laws.
Let’s say a company receives an invoice from a supplier for services rendered or goods delivered in a cryptocurrency, such as bitcoins(BTC). In order to record the transaction correctly, it is necessary to state
- cryptocurrency amount – the actual amount the customer has to pay in BTC, for example 1 BTC.
- Conversion to national currency – at the time of the transaction, the exchange rate of the cryptocurrency against the national currency (e.g. the euro) must be fixed in order to calculate the cost of the transaction in the national currency. Let’s assume that the exchange rate of BTC against the euro on 17.10.2024 is 1 BTC = 62 185 EUR. Therefore, the cost of the transaction in national currency is 62 185 EUR.
Cryptocurrency transactions are accounted for in the same way as normal economic transactions. Let’s review the steps of the process.
- Recognition of the liability (recording the invoice) – once the invoice is issued, it is recorded in the books at the exchange rate at the time of the transaction. In our example, this is 1 BTC = 62 185 EUR, so the liability is 62 185 EUR in national currency. In the accounting entries, the company’s liability to the supplier is recorded at EUR 62 185.
- Invoice payment in cryptocurrency – Due to the volatility of cryptocurrencies, an exchange rate mismatch may occur when paying an invoice. For example, if a company pays an invoice one week later because of a change in the exchange rate and by that time the BTC exchange rate has risen to EUR 63 420, the invoice payment is recorded in national currency as EUR 63 420. The exchange difference is EUR 1 235 and is recognised as a foreign exchange loss.
A mismatch occurs if the cryptocurrency exchange rate changes between the time of invoicing and the actual payment. Such a change in the exchange rate will result in either a loss or a gain, depending on the direction of the change.
Example of the recognition of an exchange difference
Suppose a company receives an invoice for 1 BTC (at an exchange rate of EUR 62 185) but pays it a week later when the exchange rate has risen to EUR 63 420.
1. First entry (invoice registration):
- Debit: 62 185 EUR (cost of goods or services).
- Credits: 62 185 EUR (obligation to supplier).
2. Recording of the transaction at the moment of payment (in case of exchange rate change):
- Debit: EUR 63 420 (liability to supplier).
- Credits: 1 BTC (company’s crypto wallet).
3. Recognition of exchange rate difference:
- Debit: 1 235 EUR (exchange rate difference loss).
The payment of invoices in cryptocurrencies and their recording in the accounts requires particular attention to be paid to exchange rate fluctuations, as they may affect the financial results of the company. The accurate use of the exchange rate at the time of the transaction and the timely accounting for exchange differences will help the company to reduce risks and avoid unexpected financial losses.
The specialists at Kidnes OÜ will share their advice on cryptocurrency accounting. Ask for more information here.
Article taken from rmp.geenius.ee.
