BoP Accounting Principles – Debit vs Credit Entries
BoP follows the Double Entry Bookkeeping system. Every international transaction has two sides: a Debit and a Credit.
1. The Golden Rule of BoP
Unlike normal accounting (Debit the Receiver), BoP Accounting focuses on Foreign Exchange Movement.
- Credit (+): Any transaction that brings Foreign Currency IN (Inflow/Receipt).
- Debit (-): Any transaction that sends Foreign Currency OUT (Outflow/Payment).
2. Classification of Entries
| Transaction | Direction of Forex | Accounting Entry | Sign |
|---|---|---|---|
| Export of Goods | Inflow (We get $) | Credit | + |
| Import of Goods | Outflow (We pay $) | Debit | - |
| Services Rendered (IT) | Inflow | Credit | + |
| Foreigners travelling here | Inflow | Credit | + |
| Indians travelling abroad | Outflow | Debit | - |
| Receiving a Loan | Inflow (Liability) | Credit | + |
| Investing Abroad (FDI) | Outflow (Asset) | Debit | - |
Note: Receiving a Loan is a Credit (Positive) item because money comes in, even though it creates a liability.
3. Dis-equilibrium in BoP
Ideally, Credits = Debits. But in reality:
- Surplus: Credits > Debits. (Demand for domestic currency rises).
- Deficit: Debits > Credits. (Demand for foreign currency rises).
How is Deficit Financed?
- Borrowing from IMF.
- Selling Gold or Forex Reserves.
4. Exam Notes: Writing the Answer
Question: "Explain the Accounting Principles of Balance of Payments." (5 Marks)
Answering Strategy:
- System: Mention "Double Entry System".
- Rule: "Inflow = Credit, Outflow = Debit".
- Examples: Important! Give 2 examples.
- Ex: Export to USA -> Credit Current Account.
- Ex: Import from China -> Debit Current Account.
Summary
- Inflow (+) vs Outflow (-): This is the only rule you need to remember.
- Assets vs Money: Buying a foreign Asset (like a factory in London) is a Debit because money leaves India to buy it.
Quiz Time! 🎯
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