Full Form Of Bop Balance Of Payment Definition Interpretation

Full-Form of BOP (Balance of Payment)

Features

The main feature of BOP is that it is a record-keeping system that helps to maintain all transactions between one country and the rest of the world systematically. All transactions are included, like export-import of goods, services, and everything.Whenever there is an inflow of foreign exchange, then that is recorded as a credit item, and whenever there is an outflow of foreign exchange, then that is recorded as a debit item.The records are maintained in the Double-entryDouble-entryThe double-entry accounting system refers to the double effect of every journal entry. It is based on the dual aspect i.e. Debit and Credit and this principle states that for every debit, there must be an equal and opposite credit.read more accounting forms. So the balance will tally.The overall BOP will always match as double entry is maintained, but individual accounts can portray balances that give an idea of the inflow or outflow of funds.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Full Form of BOP (wallstreetmojo.com)

Formula

There is no such formula. The concept is that by adding balances of the three accounts, the net should be zero. So:

Differences will show if there is a deficit or surplus of foreign exchange.

Example

Calculate BOPCalculate BOPThe formula for Balance of Payment is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to the recording of all payments and obligations pertaining to imports from foreign countries vis-à-vis all payments and obligations pertaining to exports to foreign countries. It is the accounting of all the financial inflows and outflows of a nation.read more based on the information mentioned below:

Export of Goods – $ 2,000,000Imports of Goods – $ 5,000,000Export of Services – $ 1,000,000Import of services – $ 2,000,000Import of research – $500,000Non-Financial Assets bought in other countries – $5,000,000Financial Investments are made in other countries – $7,000,000FDI received – $5,000,000FII received – $ 4,000,000Reserve of the country – $50,000,000

Solution:

Calculate the BOP

Step 1: Calculate the total Current account. Here the goods and services between countries are recorded. The Net Total of Current Account is -$4,500,000Step 2: Calculate the total Capital accountCapital AccountThe capital account refers to the general ledger that records the transactions related to owners funds, i.e. their contributions earnings earned by the business till date after reduction of any distributions such as dividends. It is reported in the balance sheet under the equity side as “shareholders’ equity.”read more. Here the Non-Financial Investments are recorded. The investment can either be from other countries or your country investing abroad. The net total is $5,000,000Step 3: Calculate the total financial Account. It consists of financial investments, whether inflow or outflow. The Net Total is $2,000,000Step 4: The BOP balance is coming out to be -$7,500,000Step 5: This balance represents a deficit. So this deficit in foreign exchange must be balanced with the help of Reserves. So the government will use reserves worth $7,500,000

Components

#1 – Current Account

It deals with the various inflow and outflow from goods and services exchanged between nations. If goods and services are being exported to different nations, then that leads to an inflow of money. So this carries a credit balance.

#2 – Capital Account

This account impacts when non-financial assets are either bought or sold. Suppose the land is being sold to individuals from other nations. Then that is an inflow of money, so it will carry a credit balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. read more.

#3 – Financial Account

This is a volatile account, and it depends on the investments made by other nations for the purchase of securities. If individuals from your country buy financial securities in other nations, then that is the outflow of money, so debit.

Importance

Difference Between BOP and Balance of Trade

The balance of trade only focuses on the difference between export and import of goods, but BOP is the actual movement of foreign exchange. The foreign exchange movement can be for several factors. The export and import of goods is a part of it. So if someone wants to concentrate only on the import and export of goods, then they should consider the balance of trade.

Conclusion

BOP is needed to understand the state of a country. It helps the government to focus on sectors that need attention. So BOP should be properly maintained, and proper action should be taken to see the indicators from BOP.