Why Balance of Payments Always Balances
The Balance of Payments of a country always balances
The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.
Since the balance of payment is based upon system of double-entry book-keeping, the total debits must equal to total credits. This is because two aspects of each transaction recorded are equal in amount but appear on opposite sides of the balance of payments account. In this accounting sense, balances of payments for a country must always balance.
The debit side shows the use of total foreign exchange acquired in a particular period. The credit side shows the sources from which the foreign exchange is acquired during a particular period.
Against every credit entry, there is an offsetting debit entry & viseversa, so the receipts and payments on these two sides must be equal. Hence the two sides must necessary balance.
If X imports from Y, Y would also import from X. Hence there would be a debit and credit entries in the balance of payments of both the countries X & Y.
The individual items in the balance of payments may not balance. But the total credits of the country must be equals to its total debits.
If there is any deficit in any individual account, it would be covered by a surplus in other accounts, if there is any difference between total debits and total credits, it would be settled under 'errors & omissions'.
Errors and omissions is a balancing item so that total credits and debits of the three accounts must equal in accordance with the principles of double entry book-keeping so that the balance of payments of a country always balances in the accounting sense.
While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on
The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.
Since the balance of payment is based upon system of double-entry book-keeping, the total debits must equal to total credits. This is because two aspects of each transaction recorded are equal in amount but appear on opposite sides of the balance of payments account. In this accounting sense, balances of payments for a country must always balance.
The debit side shows the use of total foreign exchange acquired in a particular period. The credit side shows the sources from which the foreign exchange is acquired during a particular period.
Against every credit entry, there is an offsetting debit entry & viseversa, so the receipts and payments on these two sides must be equal. Hence the two sides must necessary balance.
If X imports from Y, Y would also import from X. Hence there would be a debit and credit entries in the balance of payments of both the countries X & Y.
The individual items in the balance of payments may not balance. But the total credits of the country must be equals to its total debits.
If there is any deficit in any individual account, it would be covered by a surplus in other accounts, if there is any difference between total debits and total credits, it would be settled under 'errors & omissions'.
Errors and omissions is a balancing item so that total credits and debits of the three accounts must equal in accordance with the principles of double entry book-keeping so that the balance of payments of a country always balances in the accounting sense.
While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on