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Double Entry Book Keeping

 Double Entry Book Keeping

Double Entry Book Keeping

It is significant to note that the balance of payments of a nation will always balance and therefore, will always be in symmetry. This depends on the double entry system of book keeping where every transaction is accounted two times in the name of debit entry and credit entry.

Let us see an illustration which teaches the double entry system.

Illustration 61

With the below list of items draw a balance of payment account using double entry method.

Items

Amount in Million $

Sale of Goods

300

Purchase of Goods

450

Sell abroad of Gold goods

1500

Importation of Gold

1800

Sell abroad of Services

750

Importation of Services

150

Independent Receipts

150

Independent Payments

240

Capital Receipts

300

Capital Payments

360

Solution

Balance of Payments of a Nation

Row No.

Receipts (Credits)

Amount in Million $

Row No.

Payments (Debits)

Amount in Million $

1.

Sell abroad of Gold goods

1500

6.

Importation of Gold Goods

1800

2.

Sell abroad of Services

750

7.

Importation of Services

150

3.

Independent Receipts

150

8.

Independent Payments

240

4.

Capital Receipts

300

9.

Capital Payments

360

5.

Sale of Goods

300

10.

Purchase of Goods

450

 

Sum of Receipts

3,000

 

Sum of Payments

3,000

Explanation

  1. The above presentation represents a supposed instance of the balance of payments of a nation. The left side is the table depicts the modes in which a nation obtains overseas currency whilst the right side of the table depicts the modes in which a nation expends the overseas currency.
  1. Balance of Trade – in the above tablet, Row 1 shows that the nation earns $1,500 millions as overseas negotiation by selling goods abroad. Likewise Row 6 depicts that a nation expends $1,800 millions of overseas negotiation by importation of goods. These two rows indicate the balance of trade that is equal to -300 $ since (1500-1800). This entails that there is an advance balance of trade.
  1. Balance of Services – Likewise, the Row 2 shows that the nation earns $750 millions as overseas negotiation by selling services abroad. Correspondingly, Row 7 shows that the nation expends $150 million of the overseas negotiation by importation of services.
  1. These two rows show the balance of hidden trade equal to $600 millions i.e. (750-150). This entails that there is a favourable balance of services or hidden trade.
  1. Balance of Independent Transfers – Row 3 depicts that the nation earns $150 millions as overseas negotiation from independent receipts. Likewise, Row 8 depicts that the nation expends $240 millions of the overseas negotiation on independent payments.
  1. These two rows depict the balance of balance of independent transfers equal to – 90$ i.e. (150-240). This entails that there is an unfavourable balance of independent transfers.
  1. Balance of Current Account – The balance of current account incorporates Row nos. 1, 2, 3, 6, 7 and 8. The balance of current account incorporates the above three items i.e. difference in Balance of trade – 300$, balance of services $600 and balance of independent transfers – 90$, to show the excess on the current account equal to $210 millions.
  1. Balance of Capital Account – Row 4 depicts that the nation earns $300 millions as overseas exchange from capital receipts. Likewise, Row 9 shows that the nation expends $360 million of the overseas negotiation on capital payments. These two rows show an insufficiency in capital account of -60$ i.e. (300-360).
  1. Balance of Official Reserve Account – Row 5 depicts that the nation earns $300 millions as overseas negotiation from the sale of gold goods. Likewise, Row 10 shows that the nation expends $450 millions of overseas negotiation on purchase of gold goods. These two rows indicate the insufficiency of balance of official reserve account equal to -150$ i.e. (300-450).
  1. Balance of Payments – The Balance of Payments incorporates the above three items of balance in current account, balance in capital account and balance of official reserve account and this indicates the balance in balance of payments in accounting logic.
  1. The balance of current account equals $210 millions whilst the balance of capital account indicates an in sufficiency of equal to -60$. The official reserve account gives the balancing aspect through a net purchase of gold goods equal to $150.

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