Accounting Basics

Accounting Basics

Some common terms that reflect our economy and controlled by RBI, which will be heard in every part of India but most of its real meaning will be unknown to most of us.

Balance of Payments: Every single economic transaction happening in a country will have its effect in Balance of payments. BOP is a record of all transactions happening in a country. To understand the functioning of BOP, one should know about capital and current account.

Capital account: Also referred as financial account. Capital account is concerned about the ownership of domestic and foreign assets.  Capital account is manipulated by further 4 items

1)      Foreign direct investments (FDI): This section of capital account refers to the foreigners investing in construction, plants etc., to own a business in India. Capital account surplus is when inflow of money by foreigners is more than the outflow made by Indian in foreign assets.

2)      Portfolio investment: Unlike FDI, this section refers to short term investments in shares and bonds. Foreign investors investing in Indian portfolios will help to achieve a capital account surplus. Indian investors targeting foreign portfolio, though it increases the assets it is a cash outflow.

3)      Other investment: This section includes loans and reserve account. Loans, which in turn points to Indians obtaining loan from foreign banks and Foreigners approaching Indian banks.

Reserve account:  Reserve account keep hold of all foreign currencies, which will help the central bank to manage the emerging demand.

Current account: Current account speaks about the balance of trade in the economy (i.e) inflows and outflows due to trading happening in economy. Trade basically means export and import of goods and transfers.

Further a balancing item will be added to the summation of capital and current account to ensure that any statistical error or discrepancy in calculation will be compensated with this value to end up at 0 (i.e) to ensure balanced payments

To put in more clarity –   “current account + capital account + balancing item = 0 “

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