Discuss the BOP (Balance of Payments) Accounting system.
BOP Accounting system or Balance of Payments Accounting system summarizes the flow of economic transactions between, the residents of a given country and the residents of rest of the world during an accounting year. Following are basic types of economic transactions recorded in BOP (Balance of Payments) :
- Purchases and sales of goods and services against financial items i.e. claims and monetary gold.
- Barter of goods and services.
- Interchange of financial items against other financial items e.g. sale of securities for money or repayment of debts.
- Provisions or acquisitions of goods and services without requital e.g. grants-in-aid.
- Provision or acquisitions of financial items without requital e.g. in payment of taxes or as a gift.
Residents means the individuals whose general center of interest is in the given economy for more than one year. BOP accounting is a double entry system. For every transaction two entries are made, one credit (+) and one debit (-). Total credit must match the total debit leaving out the error and omissions. Since it is a balance sheet, all transactions balance. Following are two basic principles of accounting:
All transactions which lead to an actual or prospective payments from the rest of the world to the country are recorded as credit entries. The payments actual or prospective are recorded as debit entries. If converse situation is there i.e. all the transactions, whether actual or prospective, from country to the rest of the world are recorded as debits and the corresponding payments as credits.
A transaction which results in an increase in demand for foreign exchange (Imports) is recorded as a debit entry while a transaction which results in an increase in the supply of foreign exchange (Exports) is recorded as a credit entry.
A payment received from the rest of the world which increases the country’s assets, can either be a claim on foreign entity or an amount deposited in a bank. Thus, an increase in foreign assets would appear as debit entry. Conversely, a payment to the rest of the world reduces the country’s foreign assets or increases its liabilities owed to foreigners. A reduction in foreign assets or increase in liabilities of nationals appear as credit entry.
Since the balance of payment accounts are compared across countries, a common practice of valuation is required. IMF recommends F.O.B. (Free on Board) and not the C.I.F. (Cost, Insurance and Freight). In India, the exports are reported at F.O.B. and the imports at C.I.F. prices. The exchanges rate used should be the exchange rate prevailing at the time of the transaction. But in practice it is the monthly average exchange rate which is used to evaluate the value in terms of foreign currency.