The balance of payments is supposed to be for a country what a balance sheet is for a company. For example, 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, 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 differs from the structuring of international economic accounts at the U.S. Bureau of Economic Analysis.

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

Like all double-entry accounting systems, the debits and credits in the balance of payments should theoretically balance. This does not always occur due to 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.

Current Account

There are four subaccounts in the current account: merchandise trading, service purchases, income receipts and unilateral transfers. Unilateral transfers can include foreign aid or gifts and is particularly difficult to balance out in the other accounts.

Merchandise and services are what most people think of when they hear "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 subaccount tracks income from financial assets, such as dividends from stocks or interest payments from bonds.

Capital Account

Most capital accounts show two subaccounts: capital transfers and 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 here, although determining value can be tricky.

Financial Account

Recording the financial account suffers from the most inconsistency among different balance of payments methods. 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.

  1. What is the difference between the current account and the capital account?

    Learn how to differentiate between the capital account and the current account, the two components of the balance of payments ... Read Answer >>
  2. What's the difference between the current account and the capital account?

    The current account considers goods and services currently being produced. The capital account is concerned with payments ... Read Answer >>
  3. Is a deficit in the balance of payments a bad thing?

    Discover how it might be possible to run a balance of payments deficit, what that means in terms of international trade and ... Read Answer >>
  4. What are the components of a financial account?

    Understand what the financial account is and how it relates to a country's balance of payments. Learn about the components ... Read Answer >>
  5. What is a trade deficit and what effect will it have on the stock market?

    Learn what is a trade deficit is, also known as net exports, and what effect they have on the stock market. Read Answer >>
Related Articles
  1. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments, indicating the state of its economy and economic outlook.
  2. Insights

    Exploring the Current Account in the Balance of Payments

    Learn how a country's current account balance reflects the country's economic health.
  3. Personal Finance

    Current Account Deficits: Government Investment or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.
  4. Insights

    The Balance Of Payments

    The "Balance of Payments" is a record of all payments or monetary transactions between a particular country and other nations during a specific time period. It provides a useful glimpse into ...
  5. Investing

    What's the Balance of Trade?

    The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports.
  6. Personal Finance

    The Credit Card Balance Transfer Trap

    Before you transfer a balance to a credit card with a lower interest rate, understand how it affects new purchases and other fine-print traps that can cost you.
  7. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  8. Insights

    Why Deficits Are Flawed Measures of Unfair Trade

    Trump’s obsession with erasing the $500B U.S. trade deficit is flawed economics, experts say.
  9. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  1. Financial Account

    The financial account is a component of a country’s balance of ...
  2. Balance of Payments (BOP)

    The balance of payments is a statement of all transactions made ...
  3. Capital Account

    A national account that shows the net change in asset ownership ...
  4. Official Settlement Account

    An official settlement account is an account used to keep track ...
  5. Accounting

    The systematic and comprehensive recording of financial transactions ...
  6. Transfer

    A change in ownership of an asset, or a movement of funds and/or ...
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center