Lesson_46_Double-entry Bookkeeping

Lesson_46_Double-entry Bookkeeping - Double-Entry...

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1 Lesson 46 1 Double-Entry Bookkeeping Every international exchange can be thought of as having two pieces For most of this course, we have been thinking of barter trade If X is twice as expensive as Y on world markets, residents of a country that wanted to import one unit of X would have to pay by exporting two units of Y Lesson 46 2 The two sides of this transaction are the imports of X and the exports of Y These two parts are bundled together More generally, we can allow payment in the form of money or other financial instruments Each transaction then involves the sale of a good, service, or asset and the means of payment Lesson 46 3 Accountants recognize this double-sided nature of transactions by implementing system of double-entry bookkeeping This applies particularly to interpreting a country’s balance of payments
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2 Lesson 46 4 A country’s balance of payments is an accounting statement that records “all” transactions between residents of one country and those in the rest of the world over some period of time The statement sorts transactions into a 2 by 2 matrix Lesson 46 5 First, transactions are sorted into whether they involve a flow of goods (or services) or whether they are financial flows Trade in goods and services are recorded in one “account,” whereas financial flows are recorded in a separate account Lesson 46 6 The account that records goods and services is called the current account The account that records financial flows is called the financial account The next separation is whether the transaction involves the import or export of a good or service, or whether it results in a financial inflow into or outflow from the country
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3 Lesson 46 7 Start with the current account Exports of goods or services are recorded in the current account as a positive entry
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Lesson_46_Double-entry Bookkeeping - Double-Entry...

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