can someone pls explain (1 Viewer)

[RM1]

For example, when a shipment of wheat is exported from Australia to an overseas buyer, a credit entry will be made in the balance of payments reflecting the value of the shipment that has been provided to the overseas buyer. On the other side of the transaction, the Australian seller receives a payment for the wheat shipment and this payment is recorded as the offsetting debit entry. Since every transaction in the balance of payments has two offsetting entries, the total balance of payments should be zero.

Im so confused aren't credits inflows of money and debits outflows of money? How can the payment received for the export be a debit if its coming into Australia?

 

[jane1820]

@Hehehe22 ITS YOUR TIMEEE

 

[Hehehe22]

This is an excellent question. The BoP is unnecessarily confusing in so many ways, but I'll try my best to break down this question.

Essentially, the BoP acts in a "double-entry accounting system", which means that any credit on the CA must be offset by a debit in the KAFA. The CA records exports and imports of real (non-financial) value, known as non-reversible transactions, while the KAFA records the corresponding movement of financial capital needed to pay for those transactions, known as reversible transactions. In the statement you've put, the export of wheat is a credit on the CA since it's non-financial, and you're technically making a claim on a particular value of foreign currency. When you receive the currency from overseas, you're kinda importing foreign financial assets using this claim, thus in a way you are paying for it.

I hope that makes a bit of sense, but if I'm gonna be honest, you typically only need to know that it's a credit on the CA, and then just assume the corresponding KAFA debit via double-entry accounting. This is what my HSC marker teacher told me when I asked him a similar question, and I scored a high band 6 with this assumption, so don't worry about it too much.

 

[RM1]

This is an excellent question. The BoP is unnecessarily confusing in so many ways, but I'll try my best to break down this question.

Essentially, the BoP acts in a "double-entry accounting system", which means that any credit on the CA must be offset by a debit in the KAFA. The CA records exports and imports of real (non-financial) value, known as non-reversible transactions, while the KAFA records the corresponding movement of financial capital needed to pay for those transactions, known as reversible transactions. In the statement you've put, the export of wheat is a credit on the CA since it's non-financial, and you're technically making a claim on a particular value of foreign currency. When you receive the currency from overseas, you're kinda importing foreign financial assets using this claim, thus in a way you are paying for it.

I hope that makes a bit of sense, but if I'm gonna be honest, you typically only need to know that it's a credit on the CA, and then just assume the corresponding KAFA debit via double-entry accounting. This is what my HSC marker teacher told me when I asked him a similar question, and I scored a high band 6 with this assumption, so don't worry about it too much.

TYSM, very helpful!