Definition of BOPs and Accounting Principles

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

3. Understanding the bookkeeping procedures for BOP accounting

Each transaction is recorded in accordance with the principles of double-entry book keeping, meaning that the amount involved is entered on each of the two sides of the balance-of-payments accounts. For every transaction there must be two entries, one is credit, and the other one is debit. Consequently, the sums of the two sides of the complete balance-of-payments accounts should always be the same, and in this sense the balance of payments always balances. In practice, the figures rarely balance to the point where they cancel each other out. This is the result of errors or omissions 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 (im) 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 BoPs.

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.

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. The same is summarized in Table.