Current balance
The current balance is the amount of visible balance, payments, and income on the invisible items. Visible balance shows the payment for the goods imported and exported and it is part of the current account. The perfect situation is when the earnings from goods and invisibles exported are equal expenditure on the goods and invisibles imported during the one year. However, it is a really rare situation.
The current account which is straightforward with a current balance is supposed to show a difference between earnings and expenditure. When the value of the goods and invisibles exported exceeds the value of goods and invisibles imported it is called surplus current balance. We say that there is a deficit current balance when the value of the goods and invisibles exported is smaller than the value of goods and invisibles imported. The main task of the current balance is to show how far an entity is paying its way (J. Harvey, E. Jowsey 2007, p. 491). Current balance adjustments are often a result of changes in national home and abroad income, the percentage of it which is spent, and the scale of spending which goes on domestic as against overseas goods and services (P. J. Curven i in. 1992, p. 174).
There is a technique of estimating the amount of the appropriate accrued liability which is used by contractors. That technique is connected with the current balance. At the end of accounting period, the contractors estimate the amount of cost for that period. The easiest way is to focus on the liability account rather than on the corresponding expense account. The contractors can estimate by determining the current balance in the liability account, determining what the current balance should be, and calculating the discrepancies between these two conditions. Focusing on the difference between what the current balance is and what should be, gives the proper year-end adjusting entry for every liability whose amount must be estimated, even when it is a need to reducing the liability account (L. K. Anderson 2019, p. 471).
Determinants of current balance
There are many determinants of current balance which affect the current account indirectly. As an example we can mention (J. Decressin, E. Stavrev 2009, p. 18):
- Notably population growth
- Old - age dependency ratios
- Demographic dynamics
- Net foreign assets
- The gross domestic product (GDP) level
- The real exchange rate
- Fiscal policies
Equilibrium as a balance
In accounting, we can meet the term "equilibrium". In general, the accounts as a whole must be balanced by definition. Achieving it, does not require any individual component of the accounts to have zero value (for example, the current balance). The main point is how to express the objective of policy relating to the balance of payments. Reports about the state of the economy, sent by the capital and current accounts are rather different and care about the accounts has always been focused on the current balance. It is justified by the statement that the current balance should be equilibrium in the sense that it should have a value of zero (P. J. Curven i in. 1992, p. 178).
| Current balance — recommended articles |
| Depreciation of fixed assets — Cash flow analysis — Sum of years digits method — Gross revenue — Net income margin — Effective demand — Nominal exchange rate — Net cost — Government expenditure |
References
- Anderson L. K. (2019), Accounting for Government Contracts--Cost Accounting Standards, LexisNexis, New York
- Barrel R. (red.) (2010), The impact of global imbalances: does the current account balance help to predict banking crises in OECD countries?, "National Institute Economic Review", no. 206
- Curven P. J. (red.) (1992), Understanding the UK Economy, MacMillan, Hampshire
- Decressin J., Stavrev E. (2009), Current Accounts in a Currency Union, International Monetary Fund, Washington
- Harvey J., Jowsey E. (2007), Modern Economics: An Introduction, Palgrave MacMillan, Hampshire
- Micossi S. (2016), Balance-of-Payments Adjustment in the Eurozone, "CEPS Policy Brief"
- Siyuan H., Yipeng L. (2018), Empirical Analysis of the Influence Factors of China’s Current Account Surplus, "Advances in Social Science, Education and Humanities Research", volume 179
Author: Joanna Milowska
