In the complicated world of international finance, banks and institutions need a standard in which to process their facts and figures; that is why most use some form of accounting currency. Simply put, accounting currency is the form of currency used within a specific organization for the purposes of internal accounting. As an example, consider a bank in France which conducts all of its business in French francs. The francs would be considered the bank’s accounting currency.
There are some circumstances in which an institution’s accounting currency isn’t used – for example, Special Drawing Rights. Special Drawing Rights is a reserve currency that was created by the IMF to decrease the pressure on the U.S. dollar and gold reserves during international transactions. This form of currency is primarily used for the IMF’s internal accounting; however, there are a few currencies which are actually pegged to the SDR deriving their value from a combination of the U.S. Dollar, the euro, the Japanese yen and the British pound.
Accounting currency enables a more understandable comparison between prices, costs and profits. This allows an institution to evaluate its performance most accurately and ensures shareholders are better able to interpret past performance in light of potential future profits. Today, money is the most commonly used form of currency, which increases the efficiency of market economies.
The choice to use an accounting currency is much more common among companies which have operations in a country with a powerful currency, such as the euro. In smaller market economies local currencies are more likely to be used as the internal accounting currency while a foreign selling currency is adopted as well for international interactions.