The Balance of Payment Definition

Subject: Accounting
Pages: 2
Words: 354
Reading time:
2 min

Balance of payment (BoP) involves an accounting system that endeavors to explore how two or more countries conduct their international transactions within a given duration of time. An international transaction between two countries can be recorded as a debit or a credit transaction. In a credit transaction, money tends to flow into the country. On the other hand, in a debit transaction, money tends to leave a given country. For example, in case a Brazilian firm settles an interest payment to a loan, it owes a financial institution in the United States, such a transaction will be debited in the Balance of Payment account in Brazil, and credited in the Balance of Payment account in the United States.

The BoP can be in the form of current, capital, or financial account. A current account captures earnings in investments and trade in goods and services by a given country in the international market. On the other hand, capital accounts entail the disposal and acquisition of non-financial, non-produced assets, and capital transfers. The financial account deals with non-financial and financial capital record transfers.

From a theoretical point of view, the current account is supposed to balance with the financial and capital accounts. Should this happen, a country is said to have a zero balance of payment. For example, should the US purchase more services and goals that what it sells, a current account deficit ensues? In such a case, the difference between the two must be financed by borrowing either externally or internally. Alternatively, the governments may decide to buy less capital and sell more, resulting in a capital account surplus. Should a country decide to trade its services and goods for capital, it is likely to be faced with a current account deficit. Having a large trade deficit means that a county could be forced to seek money from elsewhere. Since the end of World War II, the US has consistently had a negative balance of payment nearly every year, an indication that we have big wants, which is why we have to keep on borrowing both externally and internally to cushion this deficit.