The Balance of Payment Meaning:: Alliance Business Academy Rudramurthy BV 9845620530

Alliance Business Academy
Rudramurthy BV
9845620530
THE BALANCE OF PAYMENT
MEANING:
Balance of payment of a Country is a systematic accounting record of all economic transactions

during a given period of time between the residents of the country and residents of foreign
countries. It represents an accounting of country’s international transactions for a particular
period of time, generally a year. It accounts for transactions by individual, businesses and
Government.
ECONOMIC TRANSACTIONS:
It refers to transfer of economic value from one economic agent to another. Transfer can be
Bilateral or Unilateral. The following are the different types of economic transactions:
a) One Real and another Financial Transfer.
Ex: Purchase or Sale of goods and services.
b) Two Real Transfers.
Ex: Barter transactions.
c) Two Financial Transfers.
Ex: Purchase of foreign securities for payment in cash.
d) One Real Transfer.
Ex: A Unilateral gift in kind.
e) One Financial Transfer.
Ex: A Unilateral Financial gift.
BALANCE OF PAYMENT ACCOUNTING:
BOP conforms to the principles of double entry system i.e. every international transaction should
have a debit and corresponding credit. BOP is neither an income statement nor a Balance sheet.
It is a statement of Sources and Application of funds that reflects changes in assets, liabilities and
Networth during a specified period of time.
Decrease in assets, increase in liabilities and increase in Networth represent credit or Sources of
fund and similarly Increase in assets, decrease in liabilities and decrease in Networth represent
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9845620530
debit or Application of funds. Sources of funds (Credits) include export of goods and services,
investment and interest earnings, unilateral transfers received from abroad and loans from
foreigners. Application of funds (Debits) include import of goods and services, dividends paid to
foreign investors, transfer payments abroad, loans to foreigners and increase in reserve assets. In
short transactions which earn foreign exchange inflows are credits and those which expend or
use up foreign exchange are debits.
If expenditure abroad by residents of one nation exceeds what the residents of that nation can
earn from abroad, that nation is supposed to have a “Deficit” in BOP. However if a nation
receives from abroad more than what it spends, then it is supposed to have “Surplus”.
COMPONENTS OF BALANCE OF PAYMENT:
1. The Current Account:
It is typically divided into 3 categories namely, merchandise trade balances, services balance and
the balance on unilateral transfers. Entries are recorded at their current value and surplus in
current account represents an inflow of funds while a deficit represents an outflow of funds.
The balance of merchandise trade refers to balance between exports and imports of goods such
as machinery, automobiles etc. Services also called Invisibles include interest payments,
shipping and insurance fees, tourism, dividends, military expenses etc. Unilateral transfers
include gifts and grants from both private and Government.
2. The Capital Account:
Capital account consists of Foreign investment including direct Investment and portfolio
Investments, Loans, Banking Capital, Rupee debt service and other Capital. It includes
acquisition of firms, Purchase and sale of stocks, Establishment of subsidiaries, etc.
3. The Official Reserve Account:
These are Government owned assets which represents purchases and sales by the central bank of
the country. The changes in the Official reserve account are necessary to account for the deficit
or surplus in the BOP.
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Format:
I. Current Account:
a) Merchandise
b) Services (Invisibles)
c) Other Income (Transfers and others)
II. Capital Account:
a) Foreign Investment.
b) Loans.
c) Banking Capital.
d) Rupee Debt service.
e) Other Capital.
III. Official Reserve Account:
a) Errors and Omissions.
b) Overall balance. (Total of Current Account, Capital Account and Errors and Omissions)
c) Monetary Movements.
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THE BALANCE OF PAYMENT

Balance of payment of a Country is a systematic accounting record of all economic transactions

a) One Real and another Financial Transfer.

Ex: Purchase or Sale of goods and services.

b) Two Real Transfers.

Ex: Barter transactions.

c) Two Financial Transfers.

Ex: Purchase of foreign securities for payment in cash.

d) One Real Transfer.

Ex: A Unilateral gift in kind.

e) One Financial Transfer.

Ex: A Unilateral Financial gift.

BALANCE OF PAYMENT ACCOUNTING:

COMPONENTS OF BALANCE OF PAYMENT:

1. The Current Account:

2. The Capital Account:

3. The Official Reserve Account:

c) Other Income (Transfers and others)

II. Capital Account:

d) Rupee Debt service.

III. Official Reserve Account:

a) Errors and Omissions.

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