Limited Time Offer: Save 10% on all 2021 and 2022 Premium Study Packages with promo code: BLOG10    Select your Premium Package »

Balance of Payments Accounts

Balance of Payments Accounts

The balance of payments is a combined account of receipts and payments to and from other nations that arise from economic activities annually. According to C.B Kindleberger, “the balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting and the residents of the foreign countries during a given period of time.” It includes payments from individuals, firms, and the government. Besides, it includes economic transactions from visible and invisible items, i.e., services of shipping, banking, insurance, etc.

Components of Balance of Payments

The balance of payments consists of three broad groups:

  • current account;
  • financial account; and
  • capital account.

Current Account

The current account captures the inflow and outflow of goods and services. It also includes public and private gains on investments. Moreover, current accounts deal with credit and debit on merchandise trade, including raw materials and manufactured goods, and services such as transport and consultation fees.

The combination of these goods and services creates the balance of trade (BOT). The BOT is a major part of the balance of payments since it totals exports and imports. When a country has a trade deficit, it imports more than it exports and vice versa.

Generally, the current account is decomposed into four sub-accounts, namely:

  1. the merchandise trade: this includes all commodities and manufactured goods bought, sold, or given away;
  2. services: these include fees for transportation, tourism, engineering, consultation, etc;
  3. income receipt: this includes the income derived from the ownership of assets, such as income for foreign investments and dividends and interest payments; and
  4. unilateral transfer: unilateral transfers refer to earnings sent by individuals who are based abroad to their respective countries. It also includes foreign aid provided by other countries.

Capital Account

The capital account includes recordings of international capital transfers. It refers to the acquisition or disposal of non-financial and non-produced assets required for production. The capital account is broken down into two sub-accounts.

The two sub-accounts included in the capital account are  discussed below.

  1. Capital transfers include monetary flows that emanate from debt forgiveness, transfer of goods and financial assets when leaving or getting into a country.
  2. Sales and purchase of non-produced, non-financed assets such as the sale and purchase of intangible assets such as copyrights, leases, and trademarks.

Financial Account

The financial account is sub-divided into:

  1. financial assets abroad: these are further divided into official reserve assets, government reserve, and private assets. Examples of these assets are gold and foreign currencies; and
  2. foreign-owned assets: similarly, these are divided into official and other foreign assets. Examples of these assets are direct investments and securities issued by the reporting country’s government and private sectors.


Where would you most likely record patent fees and legal services?

  1. Capital account.
  2. Current account.
  3. Financial account.


The correct answer is B.

Patent fees and legal services will be recorded in the current account because they are measures of the flow of goods and services.

On the other hand, the purchase of copyrights or trademarks would be included in the capital account.

Featured Study with Us
CFA® Exam and FRM® Exam Prep Platform offered by AnalystPrep

Study Platform

Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Online Tutoring
    Our videos feature professional educators presenting in-depth explanations of all topics introduced in the curriculum.

    Video Lessons

    Sergio Torrico
    Sergio Torrico
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.