International accounting procedures between Local banks and overseas banks often involve the use of nostro and

vostro accounts. A nostro (means "ours" in Latin) account is an account maintained by a Local bank with a foreign bank that allows the Local bank to buy foreign currency. A vostro (means "yours" in Latin) account is an account maintained by an overseas bank with a Local bank that allows the overseas bank to purchase Local currency. The system of nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between the Country's (Local)Bank and foreign banks. Example : When X (Buyer) a trader in Base Country wants to purchase $5000 worth of goods by paying cash. Mr.X deposits the cash in his local bank in the country's currency for the corresponding amount ($5000) then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a NOSTRO account requesting the bank to make the payment to Y (Seller) in his local currency i.e. US Dollars. Thus facilitating the trade between X & Y. IF Y wanted to buy something from X then the foreign bank would complete the deal using their VOSTRO account in X's country.
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Origen
It helps to recall that the term account refers to a record of transactions, whether current, past or future, and whether in money, or shares, or other countable commodities. Originally a bank account just meant the record kept by a banker of the money they were

holding on behalf of a customer, and how that changed as the customer made deposits and withdrawals (the money itself probably being in the form of specie, such as gold and silver coin). Some customers will keep their own records of their transactions, for instance, so they can check for errors by the bank. That record kept by the customer is also an account, of the money the bank is holding for them. When that customer is another bank, since they also keep other accounts (of the money they are holding for their customers) there is a need to clearly differentiate between these two types of accounts. The terms nostro and vostro remove the potential ambiguity when referring to these two separate accounts of the same balance and set of transactions. Speaking from the bank's point-of-view:

A nostro is our account of our money, held by you A vostro is our account of your money, held by us

Note that all "bank accounts" as the term is normally understood, including personal or corporate checking, loan, and savings accounts, are treated as vostros by the bank. They also regard as vostro purely internal funds such as treasury, trading and suspense accounts; although there is no "you" in the sense of an external customer, the money is still "held by us".

Conventions
A bank counts a nostro account with a credit balance as a cash asset in its balance sheet. Conversely, a vostro account with a credit balance (i.e. a deposit) is a liability, and a vostro with a debit balance (a loan) is an asset. Thus in many banks a credit entry on an account ("CR") is regarded as negative movement, and a debit ("DR") is positive - the reverse of usual commercial accounting conventions. With the advent of computerised accounting, nostros and vostros just need to have opposite signs within any one bank's accounting system; that is, if a nostro in credit has a positive sign, then a vostro in credit must have a negative sign. This allows for a reconciliation by summing all accounts to zero (a trial balance) - the basic premise of double-entry bookkeeping.

[edit] Typical usage

Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its home accounting unit. For example: First National Bank of A does some transactions (loans, foreign exchange, etc.) in USD, but banks in A will only handle payments in AUD. So FNB of A opens a USD account at foreign bank Credit Mutuel de B, and instructs all counter-parties to

settle transactions in USD at "account no. 123456 in name of FNBA, at CMB, X Branch". FNBA maintains its own records of that account, for reconciliation; this is its nostro account. CMB's record of the same account is the vostro account. Now, FNBA sells AUD1,000,000 to C (a counterparty who has an AUD account with FNBA, and a USD account with CMB) for a net consideration of USD2,000,000. FNBA will make the following entries in its own accounting system: (Internal) FX AUD trading account USD Nostro at CMB (FNBA's nostro) 1,000,000 DR 2,000,000 DR AUD Account in name of C (Internal) FX USD trading account 1,000,000 CR 2,000,000 CR

Over at CMB, they record the following transaction: USD Account in name 2,000,000 of C DR USD Account in name of FNBA (CMB's vostro) 2,000,000 CR

[This is somewhat simplified; in reality C may not have an account with FNBA's corresponding bank, and will make settlement by cheque or some form of EFT. In this case CMB will make entries on several other accounts, such as a Teller's receiving account, or a clearing account with the third bank that the cheque was written on.]

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