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Balance of Payments Accounting

The balance of payments is an accounting record of a country's international transactions over a period of time, usually one year. It summarizes all monetary inflows and outflows between a country and the rest of the world, including exports and imports, as well as financial flows. The balance of payments must always balance out to zero at the end, with credits equaling debits. It is divided into the current account, covering trade and investment flows, and the capital account, covering changes in ownership of foreign assets.

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63 views

Balance of Payments Accounting

The balance of payments is an accounting record of a country's international transactions over a period of time, usually one year. It summarizes all monetary inflows and outflows between a country and the rest of the world, including exports and imports, as well as financial flows. The balance of payments must always balance out to zero at the end, with credits equaling debits. It is divided into the current account, covering trade and investment flows, and the capital account, covering changes in ownership of foreign assets.

Uploaded by

Bini Mathew
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Balance of Payments Accounting

The Balance of Payments is the statistical record of a countrys international transactions over a certain period of time presented in the form of double-entry bookkeeping. N.B. when we say a countrys balance of payments we are

referring to the transactions of its citizens and government.

A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

When all components of the BOP sheet are included it must balance that is, it must sum to zero there can be no overall surplus or deficit.
For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.

Important Rules
Credit sales of INDIA goods, services, and assets to foreigners. Debit purchases of foreign goods, services and assets by INDIAN residents.

Since 1974, the two principal divisions on the BOP have been the current account and the capital account. The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports payments for imports) , factor income (earnings on foreign investments payments made to foreign investors) and cash transfers.

Its called the current account as it covers transactions in the "here and now" - those that don't give rise to future claims.

The capital account records the net change in ownership of foreign assets It includes the reserve account (the international operations of a nation's central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments / dividends that the loans and investments yield, those are earnings and will be recorded in the current account).

Current Account
Includes transactions dealing with:
goods services = royalties, license fees, traveling, shipping, banking, insurance, consulting fees transfer payments income receipts = dividends, interest earnings, repatriated profits, compensation of employees

Sub-accounts:
merchandise trade balance balance on goods and services income account (old investment income account + compensation of employees)

Depends on:
Domestic versus foreign prices Exchange rate movements Foreign income Domestic income Market impediments

An actual balance sheet will typically have numerous sub headings under the principal divisions. For example, entries under Current account might include:

Trade buying and selling of goods and services Exports a credit entry Imports a debit entry Trade balance the sum of Exports and Imports Factor income repayments and dividends from loans and investments

Factor earnings a credit entry Factor payments a debit entry Factor income balance the sum of earnings and payments.

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