DEFINITION
Balance of payment is an accounting record of the transactions between the residents of one country and the residents of the rest of the world over a given period of time. Transactions in which domestic residents either purchase assets (goods and services) from abroad or reduce foreign liabilities are considered uses (out flow) of funds because payments abroad must be made. Similarly, transactions in which domestic residents either sell assets to foreign residents or increase their liabilities to foreigners are sources (inflows) of funds because payments from abroad are received. Thus, in a way, it resembles a company's sources and use of funds statement.
UNDERLYING PRINCIPLES AND CONCEPTUAL FRAMEWORK
The balance of payment is part of a larger system of social accounts recording the economic activity of an economy and its various sections. The social accounts relate to economic transactions not only within the domestic economy but also between the domestic economy and the rest of the world. Balance of payment is concerned with economic transactions; five basic types of economic transactions may be distinguished. They are:
a) Purchases and sales of goods and services against financial items i.e. the interchange of goods and services against claims and monetary gold;
b) Barter, i.e. the interchange of goods and services against other goods and services;
c) The interchange of financial items against other financial items e.g. sale of securities for money, or the repayment of commercial debts in money;
d) The provisions or acquisition of goods and services without requital, e.g. grants in aid;
e) The provision or acquisition of financial items without requital, e.g. In payment of taxes or as a gift.
The social accounts have common rules of credit and debit for recording economic transactions. Credit entries are made for the provision of goods and services or of financial items, whether they are sold, bartered, or furnished without requital. Debit entries are made for acquisition of goods and services or of financial items, whether these items are purchased, obtained by barter, or acquired without requital, for the first three types of transactions, the rules immediately result in equal credit and debit entries. For the remaining types, a credit entry for goods and services or financial items is matched by a debit entry for an unrequited transfer, and vice versa.
As stated earlier, balance of payments is concerned with economic transactions between the residents of the reporting country and the residents of the rest of the world. To acquire an in depth understanding, it is necessary to clarify the concept of residents. This term is certainly not identical with the term “citizen” though there is normally a substantial overlap. As regards individuals, ‘residents’ means those individuals whose general centre of interest can be said to rest in the given economy. They consume goods and services, participate in the productive process or otherwise carry out economic activity within the territory of the country on other than a temporary basis. Members of diplomatic and consular staffs and official missions, members of armed forces stationed abroad, and citizens undergoing medical treatment or studying abroad are considered residents of their own rather than of the country where they are staying. The extent to which other citizens living abroad are treated as residents (travelers) or foreigners (emigrants) depends upon a number of factors such as permanence of their living and the extent to which they shift their general "centre of interest". As regards non-individuals a set of conventions have been evolved. For example, governments and nonprofit bodies servicing resident individuals are residents of the respective countries. For enterprises, rules are somewhat complex particularly those concerning unit of corporate branches of foreign multinationals, According to IMF rules, these are considered to be residents of countries where they operate, though they are not a separate legal entity from the parent located abroad, international organizations like the UN, the World Bank, the IMF are not considered to be residents of any national economy even though their offices may be located within the territories of any number of countries.
BALANCE OF PAYMENT ACCOUNTING
The balance of payment is a standard double entry accounting record and as such subject to all the rules of double entry book-keeping viz. For every transaction two entries must be made. One credit (+) and one debit (-) and leaving aside errors and omissions, the total of credits must exactly match the total of debits i.e. the balance of payments must always balance.
Simple accounting rules followed in BOP is the following:
1. All transactions which lead to an immediate or prospective payment from the rest of the world to the country should be recorded as credit. Hence, all payments received for export of goods and services as also loans received abroad or inward foreign investment-whether direct or portfolio would be credit items,
2. Conversely, all transactions which result in an actual or prospective payment from the country to the rest of the world should be recorded as debits.
3. A transaction which results in an increase in demand for foreign exchange is to be recorded as debit entry while a transaction which results in an increase in the supply of foreign exchange is a credit entry.
Balance of payment is an accounting record of the transactions between the residents of one country and the residents of the rest of the world over a given period of time. Transactions in which domestic residents either purchase assets (goods and services) from abroad or reduce foreign liabilities are considered uses (out flow) of funds because payments abroad must be made. Similarly, transactions in which domestic residents either sell assets to foreign residents or increase their liabilities to foreigners are sources (inflows) of funds because payments from abroad are received. Thus, in a way, it resembles a company's sources and use of funds statement.
UNDERLYING PRINCIPLES AND CONCEPTUAL FRAMEWORK
The balance of payment is part of a larger system of social accounts recording the economic activity of an economy and its various sections. The social accounts relate to economic transactions not only within the domestic economy but also between the domestic economy and the rest of the world. Balance of payment is concerned with economic transactions; five basic types of economic transactions may be distinguished. They are:
a) Purchases and sales of goods and services against financial items i.e. the interchange of goods and services against claims and monetary gold;
b) Barter, i.e. the interchange of goods and services against other goods and services;
c) The interchange of financial items against other financial items e.g. sale of securities for money, or the repayment of commercial debts in money;
d) The provisions or acquisition of goods and services without requital, e.g. grants in aid;
e) The provision or acquisition of financial items without requital, e.g. In payment of taxes or as a gift.
The social accounts have common rules of credit and debit for recording economic transactions. Credit entries are made for the provision of goods and services or of financial items, whether they are sold, bartered, or furnished without requital. Debit entries are made for acquisition of goods and services or of financial items, whether these items are purchased, obtained by barter, or acquired without requital, for the first three types of transactions, the rules immediately result in equal credit and debit entries. For the remaining types, a credit entry for goods and services or financial items is matched by a debit entry for an unrequited transfer, and vice versa.
As stated earlier, balance of payments is concerned with economic transactions between the residents of the reporting country and the residents of the rest of the world. To acquire an in depth understanding, it is necessary to clarify the concept of residents. This term is certainly not identical with the term “citizen” though there is normally a substantial overlap. As regards individuals, ‘residents’ means those individuals whose general centre of interest can be said to rest in the given economy. They consume goods and services, participate in the productive process or otherwise carry out economic activity within the territory of the country on other than a temporary basis. Members of diplomatic and consular staffs and official missions, members of armed forces stationed abroad, and citizens undergoing medical treatment or studying abroad are considered residents of their own rather than of the country where they are staying. The extent to which other citizens living abroad are treated as residents (travelers) or foreigners (emigrants) depends upon a number of factors such as permanence of their living and the extent to which they shift their general "centre of interest". As regards non-individuals a set of conventions have been evolved. For example, governments and nonprofit bodies servicing resident individuals are residents of the respective countries. For enterprises, rules are somewhat complex particularly those concerning unit of corporate branches of foreign multinationals, According to IMF rules, these are considered to be residents of countries where they operate, though they are not a separate legal entity from the parent located abroad, international organizations like the UN, the World Bank, the IMF are not considered to be residents of any national economy even though their offices may be located within the territories of any number of countries.
BALANCE OF PAYMENT ACCOUNTING
The balance of payment is a standard double entry accounting record and as such subject to all the rules of double entry book-keeping viz. For every transaction two entries must be made. One credit (+) and one debit (-) and leaving aside errors and omissions, the total of credits must exactly match the total of debits i.e. the balance of payments must always balance.
Simple accounting rules followed in BOP is the following:
1. All transactions which lead to an immediate or prospective payment from the rest of the world to the country should be recorded as credit. Hence, all payments received for export of goods and services as also loans received abroad or inward foreign investment-whether direct or portfolio would be credit items,
2. Conversely, all transactions which result in an actual or prospective payment from the country to the rest of the world should be recorded as debits.
3. A transaction which results in an increase in demand for foreign exchange is to be recorded as debit entry while a transaction which results in an increase in the supply of foreign exchange is a credit entry.
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