The balance of payments for a country or nation is comparable to a balance sheet for a company or business. The balance of payments for the United States accounts for all international transactions between individuals, businesses, and government agencies. Each transaction carries a corresponding debit and credit—debits for money leaving, and credits for money entering.

Some differences exist between how certain governments present the balance of payments. The International Monetary Fund (IMF) has one standard for recording international transactions, and its method is different from the structure of international economic accounts at the U.S. Bureau of Economic Analysis.

Key Takeaways

  • The balance of payments for a country or nation is comparable to a balance sheet for a company or business.
  • The balance of payments for the United States accounts for all international transactions between individuals, businesses, and government agencies.
  • Each transaction carries a corresponding debit and credit—debits for money leaving, and credits for money entering; like all double-entry accounting systems, the debits and credits in the balance of payments should theoretically balance out.
  • There are three types of accounts listed under the balance of payments: the current account, the capital account, and the financial account.

Like all double-entry accounting systems, the debits and credits in the balance of payments should theoretically balance out. However, this does not always occur due to the inconsistencies and difficulties in accounting estimates. However, any deficit or surplus in the current account should be offset by an alternative surplus or deficit in the capital and financial accounts.

Generally, there are three types of accounts listed under the balance of payments: the current account, the capital account, and the financial account. The most well-known of these three accounts is the current account, which documents all payments for goods and services between actors in different countries. The capital account tracks capital transfers and non-financial assets between businesses and individuals in different countries. Finally, the financial account tracks reserve assets from monetary authorities. Sometimes, the capital accounts and financial accounts may be combined.

What Is the Current Account?

There are four sub-accounts in the current account:

  1. Merchandise trading
  2. Service purchases
  3. Income receipts
  4. Unilateral transfers

The unilateral transfers sub-account can include foreign aid or gifts and are particularly difficult to balance out in other accounts.

The merchandise trading and service purchases refer to what most people think of when they hear the phrase "the trade deficit." If the U.S. purchases $100 billion worth of goods and services from the rest of the world, but the rest of the world only purchases $75 billion worth of goods and services from the U.S., then the country operates with a current account deficit of $25 billion.

The income receipts sub-account tracks income from financial assets, such as dividends from stocks or interest payments from bonds.

What Is the Capital Account?

Most capital accounts show two sub-accounts:

  1. Capital transfers
  2. Non-financial assets

Capital transfers are not the same as financial investments. Capital transfers include items such as debt forgiveness, transfer of title for fixed assets, inheritance taxes, and uninsured damage to fixed assets.

Non-financial assets are defined as non-produced assets, such as natural resources, patents, copyrights, franchises, and leases.

All valuable intellectual property is recorded in the capital account, although determining its value can be tricky.

What Is the Financial Account?

The way that the financial account is recorded results in many inconsistencies across the different methods used by different countries. In the U.S, the financial account tracks assets owned by the U.S. that are held abroad and all foreign-owned assets held in the United States.

The vast majority of these assets are reserve assets, such as gold or currency claims, held by the Federal Reserve and other banks.