A statement that summarizes an economy’s transactions with the rest of the world for a specified time period. The balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts. The balance of payments classifies these transactions in two accounts – the current account and the capital account. The current account includes transactions in goods, services, investment income and current transfers, while the capital account mainly includes transactions in financial instruments. An economy’s balance of payments transactions and international investment position (IIP) together constitute its set of international accounts.

Balance of payments refers to all economic transactions between domestic and foreign residents over a stipulated period generally one year. The analysis of balance of payment is immensely useful for the policy makers and business communities. Moreover, it is an important instrument for maintaining external economic stability, A close understanding of dependence of international business upon balance of payments is necessary for successful strategy of international business. The balance of payment is broader than the balance of trade for it includes not only visible items but also invisible items. Hence, the balance of payments presents a better picture of a country’s economic and financial transactions with the rest of world than the balance of trade. Balance of payment is a comprehensive and systematic record of all economic transactions between the residents of a country and the rest of the world. It presents an account of all receipts and payments on account of goods exported, services rendered and capital received by residents/Government of a country (inflows from abroad) and goods imported, services received and capital transferred by the residents/ Government of a country (outflows abroad).

Balance of Payment Accounting

In balance of payments accounting the balance of payments should be zero because every transaction is two- sided with debits balancing credits. But in practice, the balance of payments will not always be equal to zero. This can be due to, among other things, a country’s central bank engaging in transactions that are not counted towards the country’s balance of payments, or the lack of available statistical data to record all transactions. Balance of payments is classified as: (i) balance of payment on current account, and (ii) balance of payment on capital account.

Current Account: The balance of payment on current account record the current position of the country in the transfer of goods, services, and merchandise as well as invisible items, donations, unilateral transfers, etc. Current account is like an income and expenditure account, Surplus or deficit in current account is transferred to capital account which is like a balance sheet and thus balances itself in historic sense,

Capital Account: Balance of payments on capital account shows the country’s financial position in the international scenario, the extant of accumulated foreign exchange reserves, foreign assets and