Definitions and Concepts Behind the IMF Balance of Payments Yearbooks
The Balance of Payments Yearbooks published by the International Monetary Fund are compiled based upon information provided by individual countries and gathered according to specifics set by the Fund itself in the Balance of Payments Manual. Just as there are several editions of the Manual, the resulting publications have gone through many revisions with respect both to the manner of presentation and what information is included in the various numbers presented. Consequently, it is necessary to specify what the information in the data set related to these publications refers to and how that information changes with the revisions of the Balance of Payments Yearbooks.
Underlying Accounting Principles
In Volumes 1-4, the balance sheet accounts follow the following formula:
In the Current Account:
Credit = Inflow (Income) Debit = Outflow (Payment)
In the Capital Account:
Assets = Debit (Outflow) Liabilities = Credit (Inflow)
Beginning with Volume Five of the Balance of Payments Yearbooks, the balance sheet accounts follow the following formula:
Assets: Liabilities:
Credit = Decreases Credit = Increases
Debit = Increases Debit = Decreases
Another manner in which the method can be pictured is as follows:
Credit = Inflow = Liability Debit = Outflow = Asset
In Volumes 13 on of the Balance of Payments Yearbooks, the balance sheet accounts follow the same formula as presented in Volumes 1-4, illustrated above. However, more specific information is provided.
1. Common rules of credit and debit for recording economic transactions:
Credit entries: are made for the provision of goods and services or of financial
items, whether they are sold, bartered, or furnished without a quid pro quo
Debit entries: are made for the acquisition of goods and services or financial items whether these items are purchase, obtained by barter, or acquired without a quid pro quo
For transactions with a quid pro quo, the rules immediately result in equal credit and debit entries.
2. Exception to the resident-foreigner principle
Exceptions arising from principles for recording changes in foreign assets and liabilities
The balance of payments records all changes in the foreign assets and liabilities of the compiling country which result from economic transactions. While the net changes in assets or liabilities can result only from transactions between residents and foreigners, certain mutually offsetting changes in the distribution by sector of the compiling country’s foreign assets and liabilities may arise from transactions between residents, and certain mutually offsetting changes in the distribution by type of holder of its foreign liabilities may arise from transactions between foreigners. Transactions between residents that result in the transfer of foreign assets between two of the sectors distinguished in the capital account are implicitly included in the balance of payments. The most important transactions of this kind are the transfers of foreign exchange from monetary institutions to other resident holders, and vice versa. Changes in the sector composition of foreign assets are of great interest to the users of balance of payments data. For instance, a flight of capital abroad at the expense of a country’s international reserves, or the vesting of private foreign assets by the monetary authorities, is of vital concern to that country even though both parties to the transaction are residents. The balance of payments therefore includes changes in foreign assets held by each of the sectors distinguished, independent of whether they arise from transactions between residents and foreigners or from transactions between domestic sectors.
(Taken from P. 4 of Concepts and Definitions, Volume 13)
3. Principles for recording transactions
Each economic transaction may be conceived as consisting of two flows. Each flow is matched by another flow which either constitutes a quid pro quo or is a transfer payment. For each flow there are two transactors, e.g., the buyer and seller or the payer and payee. There are thus four aspects of a transaction that may be distinguished, e.g., in the case of a commodity sold for cash: the purchase, the sale, the payment of money, and the receipt of money. The following diagram illustrates this example:
Transactor A Transactor B
Real Flow (1) Credit ---------------à (2) Debit
Financial Flow (3) Debit ß --------------- (4) Credit
The balance of payments covers an open system, since it mainly records the resident aspects of resident-foreigner transactions. It does, however, record the resident end of both flows making up an economic transaction This principle of recording may be referred to in terms of the diagram as a vertical double-entry system. If transactor A is the resident and transactor B the foreigner, entries (1) and (3) are made in the balance of payments of the compiling country.
Those transactions that are included in the balance of payments even though they are between residents or between foreigners are recorded somewhat differently from the other transactions entering the balance of payments and may occasionally be reflected there in four entries.
(Taken from P. 6 of Concepts and Definitions, Vol. 13)
4. Double-entry system; errors and omissions
The balance of payments employs a double-entry system of accounting. In general, the two offsetting entries for a given transaction or flows are not made explicitly but are included as a result of the methods used for estimating the balance of payments. The principle for recording transactions between residents and foreigners differs from that for recording other transactions. Transactions between residents and foreigners involve entries in accordance with the "vertical" double-entry system describe [above].
The schedule is defined in such a way that, as far as practicable, equal credit and debit entries are provided. However, since the sources on which the entries are based may be incomplete or inaccurate, and different sources which may not be consistent with one another are in most cases used for the two flows making up the transactions, an item for errors and omissions is included to bring the statement into balance. Since errors and omissions are likely to be partly mutually offsetting, the item is described as "net errors and omissions." A credit entry for errors and omissions denotes a net understatement of recorded credits or overstatement of recorded debits; conversely, a debit entry denotes a net understatement of recorded debits or overstatement of recorded credits.
-(Taken from Pp. 7-8 of Concepts and Definitions, Vol. 13)