For an upcoming sight-seeing visit to India, a U.S. resident recently purchased a hundred thousand Indian Rupees. His action
Click on the arrows to vote for the correct answer
A. B. C. D.B
This is a point of convention where much confusion exists. Before you answer it, you should remember two things:
In International Finance, a country's reserve of foreign currency and foreign- produced goods is treated as an asset.
In Accounting, by convention, increases in assets are recorded as "debit" entries and reductions are treated as "credit" entries.
In the above example, there is an inflow of Indian Rupees and is hence recorded as a debit to the U.S. BOP account.
Of course, it is also quite important to remember that the BOP account must balance out, just as surely as you must have debits = credits in accounting. The subtle part in BOP accounting is to recognize the offsetting credit entry that arises. Consider how this happens in the above example:
The dollars used to buy the Indian rupees represent a liability for the U.S. This debt will be extinguished during the year through a supply of goods by U.S. residents in the form of exports or end up as a recognition of liability on the Official Reserve account when the accounts are balanced at the end of an accounting period (quarter end or year end). When this happens, the offsetting credit entry shows up on the accounts and the national balance sheet balances out. Note that exports are thus treated as credits and imports are treated as debits on the BOP account.
In summary,
1. Any inflow of domestic currency represents a credit and any outflow of domestic currency represents a debit on the BOP account.
2. Any inflow of foreign currency represents a debit and any outflow of foreign currency represents a credit on the BOP account.