A financial loan by a resident of the United States to a borrower in another country entails the transfer of money by the US. resident in exchange for a promise from the borrower to repay at a future time. Suppose that U.S. residents purchase $60 million in long-term bonds issued by Canadian borrowers. Also assume that the bonds are denominated in US. dollars, so that payment for them is made by transferring U.S. dollar demand deposits. A debit entry on line 20 records the increase in U.S. holdings of foreign bonds, and a credit entry on line 24 records the increase in demand deposits held by foreigners in US. banks.
In principle, direct investment abroad by a U.S. firm could have required the same accounting entries. For the $60 million bond purchase to qualify as a direct investment, the bonds would have to be the obligations of a Canadian firm in which a U.S. party (or affiliated parties) owned at least 10 percent of the voting securities. Typically, however, direct investment abroad by a u.s. firm takes some other form, such as a purchase of foreign equity securities or a simple advance of funds to a foreign subsidiary.
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