Double Entry Accounting

Rules: Examples:
• Everyy transaction is recorded twice: a. A U.S. importer buys $100 worth of oil from Saudi Arabia and pays by a check written on his
once as a credit (with a plus sign) and Citibank account.
once as a debit (with a minus sign).

b. Japanese publisher pays $90 of royalties to an American by check drawn on the publisher’s
• Exports of goods, services or assets are account at Citibank
Citibank.
entered as credits.

• Imports of goods, services or assets are

entered as debits. c. A U.S. investor buys $30 worth of shares of Volkswagen Corp. from a German bank in Frankfurt.
The U.S.
Th U S investor
i t pays byb a check
h k written
itt on his
hi Euro
E denominated
d i t d accountt att a Frankfurt
F kf t bank.
b k

• An increase in financial assets is an

import of assets and hence recorded as
debit. d. The VW shares pay $20 worth of dividends. The U.S. investor receives a check in Euro and
deposits it in his Frankfurt account.

• An increase in financial liabilities is an

export of assets and hence recorded as
credit.
e. A Mexican immigrant working and living in the U.S. sends a $50 check to his relatives in Mexico.

• Imports and exports of official foreign

exchange reserves are recorded in the
balance of payments.

f The Federal Reserve buys $10 worth of Yen deposits from Citibank
f. Citibank.
• An increase in foreign liabilities (export
of domestic securities) or a decrease in
foreign assets (import of foreign
securities) is a capital inflow.
 Composition of BoP Credit Debit
Current Account 100

Goods (lines 2+20)

Services (lines 4+21) 90

Income (lines 12+29) 20

Unilateral transfers ((line 35)) (g

(grants and p
private remittances)) 50

Capital Account (line 39)

Financial Account

U S owned assets abroad (line 40)

U.S.–owned
(changes in U.S. holdings of foreign assets)

Foreign Securities (line 52) 30

U.S. Claims abroad (lines 53+54) 30+10 20

Foreign–owned assets in the U.S. (line 55)

(changes in foreign holdings of U.S. assets)

U.S. Securities (line 65+66)

U.S. Liabilities abroad (lines 68+69) 100+50 90

Official Reserves

U.S. official reserve assets (line 41) 10

(changes in the holdings of foreign exchange by the Fed)

Foreign official assets in the U.S. (line 56)

(changes in the holdings of U.S. dollars by foreign central banks)
 Useful Balances Balance
Current Account (CA) 110-150=
=-40

Trade Balance (goods) -100

T d Balance
Trade B l ((goods
d and
d services)
i ) -10
10

Non-reserve Capital Account (KA) 50

Overall Balance = CA + KA 10

Official Settlements Balance (OR) -10

Change in Official Reserve Assets (∆R) 10

Net Private Capital

p Inflow = KA 50

Net Official Capital Inflow = OR -10

Example: Record the following transactions into the U.S. balance of payments:
1. Wal-Mart buys $60 worth of toys from a Chinese manufacturer. Wal-Mart pays using its Yuan (Chinese currency) account at
Citibank.
g his VISA card,, an American tourist spends
2. Using p $
$20 on a meal in Belgium.
g
3. U.S. treasury pays $30 worth of interest to a Chinese investor into his dollar account at Citibank.
4. Japanese investor buys $40 worth of GE stock from Citibank using his Yen account at Citibank.
5. Chinese central bank buys $50 worth of dollars and sells an equal amount of Yuan (Chinese currency) to Citibank.

Composition of BoP Credit Debit

Useful Balances Balance
Current Account
Current Account (CA) -110
Goods (lines 2+20) 60
Trade Balance (goods) -60
Services (lines 4+21) 20
Trade Balance (goods and services) -80
Income (lines 12+29) 30
Non-reserve Capital Account (KA) 60
Unilateral transfers (line 35)
Overall Balance = CA + KA -50
Capital Account (line 39)
Financial Account Official Settlements Balance (OR) 50

U.S.–owned assets abroad (line 40) Change in Official Reserve Assets (∆R) 0
(changes in U.S. holdings of foreign assets) Net Private Capital Inflow = KA 60
Foreign Securities (line 52) Net Official Capital Inflow = OR 50
U.S. Claims abroad (lines 53+54) 60 40+
50
Foreign–owned assets in the U.S. (line 55)
(changes in foreign holdings of U.S. assets)
U.S. Securities (line 65+66) 40
U.S. Liabilities abroad (lines 68+69) 20+30
Official Reserves
U.S. official reserve assets (line 41)
Foreign official assets in the U.S. (line 56) 50