1The double-entry bookkeeping used in accounting for the balance of payments is similar to that used by business firms in accounting for their financial positions. In ordinary business accounting the amount of each transaction is recorded both as a debit and as a credit, and the sum of all debit entries must, therefore, equal the sum of all credit entries. Furthermore, in business accounting it is recognized that the total value of the assets employed by the firm must be equal to the total value of the claims against the assets, that is, that all assets belong to someone. As is well known, the claims against assets are called the liabilities of the firm. (Assets of the firm not subject to the claims of creditors are, of course, the property of stockholders, so that, broadly speaking, the firm has two classes of liabilities: those due to creditors and those due to stockholders.) By accounting convention, a debit entry is used to show an increase in assets or a decrease in liabilities, while a credit entry is used to show an increase in liabilities or a decrease in assets. Since a debit entry is always accompanied by a credit entry, it follows that the value of total assets on the books of a going concern is always equal to the value of total liabilities (including the claims of stockholders).
SOURCE: Norman S. Fieleke, What Is the Balance of Payments? Federal Reserve Bank of Boston Special Study, August 1985. Reprinted by permission. Fieleke is Vice President and Economist, Federal Reserve Bank of Boston.
These elementary principles can be applied to the recording of transactions in the balance of payments. For example, when a foreigner gives up an asset to a resident of this country in return for a promise of future payment, a debit entry is made to show the increase in the stock of assets held by U.S. residents, and a credit entry is made to show the increase in U.S. liabilities to foreigners (i.e., in foreign claims on U.S. residents). Or when a U.S. resident transfers a good to a foreigner, with payment to be made in the future, a debit entry is made to record the increase in one category of U.S. assets (U.S. financial claims on foreigners, i.e., U.S. holdings of foreign IOUs), and a credit entry is made to record the decrease in another category (goods).
These principles are illustrated in greater detail in the following section, which through a series of examples constructs a hypothetical balance-of-payments statement.
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