Balance of Payments (BoP) Accounting

Balance of payments (BoPs) is systematic statement that systematically  summarizes, for a specified period of time, the monetary transactions of an  economy with the rest of the world. Put in simple words, the balance of  payments of a country is a systematic record of all transactions between the  ‘residents’ of a country and the rest of the world.

Three main elements of actual process of measuring international  economic activity are:

  1. Identifying what is/is not an international economic transaction,
  2. Understanding how the flow of goods, services, assets, money create  debits and credits, and
  3. Understanding the bookkeeping procedures for BoP accounting.

Each transaction is recorded in accordance with the principles of  double-entry  book keeping. That is  every transaction is recorded based on accounting principle. One of these  entries is a credit and the other entry is debit. In principle, the sum of all  credit entries is identical to the sum of all debit entries, and the net  balance of all entries in the statement is zero. Exports decreases in  foreign financial assets (or increases in foreign financial liabilities) are  recorded as credits, while imports increases in foreign financial assets (or  decreases in foreign financial liabilities) are recorded as debits. In other  words, with regard to assets, whether real or financial, decreases in  holdings are recorded as credits, while increases in holdings are recorded  as debits. On the other hand, increases in liabilities are recorded as  credits, while decreases in liabilities are recorded as debits.  In practice,  the figures rarely balance to the point where they cancel each other out. This is  the result of errors or missions in the compilation of statements. A separate  balancing item is used to offset the credit or debit.

However, there is no book-keeping requirement that the sums of the two  sides of a selected number of balance of payments accounts should be the same,  and it happens that the balances shown by certain combinations of accounts  are of considerable interest to analysts and government officials. It is these  balances that are often referred to as “surpluses” or “deficits” in the balance of  payments.

The following some simple rules of thumb help to the reader to  understand the application of accounting principles for balance of  payments  accounting.

  1. Any individual or corporate transaction that leads to increase in demand  for foreign currency (exchange) is to be recorded as debit, because if is  cash outflow, while a transaction which results in increase the supply of  foreign currency (exchange) is to be recorded as a credit entry.
  2. All transactions, which result an immediate or prospective payment from  the rest of the world (RoW) to the country should be recorded as credit  entry. On the other hand, the transactions, which result in an actual or  prospective payment from the country to the RoW should be recorded as  debits.
Credit Debit
1.Exports of goods and services 1. Imports of goods and services
2.Income receivable from abroad 2. Income payable to abroad
3.Transfers from abroad 3. Transfers to abroad
4. Increases in external liabilities 4. Decreases in external liabilities
5.Decreases in external assets 5. Increases in external assets

Thus balance of payments credits denote a reduction in foreign assets or  an increase in foreign liabilities, while debits denote an increase in foreign assets  or a reduction of foreign liabilities.

In balance of payments accounting the principle of accrual accounting  governs the time of recording of transactions. Therefore, transactions are  recorded when economic value is created, transformed, exchanged,  transferred, or extinguished. Claims and liabilities arise when there is a  change in ownership. Put in simple words, balance of payments is  usually prepared for a year but may be divided into quarters as well.

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