To get a better understanding of the balance of payments accounts, let’s think of a single person’s sources of funds and uses of funds. We can summarize Harry’s budget for this month as shown in the table below:
Source of funds or use of funds | Amount |
---|---|
Income earned from selling copies of his book “Talking to snakes for fun and profit” | +dollar sign, 1000 |
Income earned from owl consultancy services | +dollar sign, 200 |
Money spent on dementor repellant | minus, dollar sign, 1200 |
Money spent paying for investment advice | minus, dollar sign, 300 |
Payment from Ron to borrow Harry’s wand | plus, dollar sign, 50 |
Allowance from Aunt Petunia | plus, dollar sign, 2 |
Harry’s balance | minus, dollar sign, 248 |
Uh oh! Harry ran a little short this month!
Suppose there was one more thing that Harry hasn’t included yet: he also loaned Lucius dollar sign, 70. That means he also has a financial asset in the form of an I.O.U. from Lucius, but also dollar sign, 70 less money available to him. That means Harry has a total shortfall of cash of dollar sign, 248, plus, dollar sign, 70, equals, dollar sign, 318. As usual, his friend Hermione bails him out of trouble by loaning him dollar sign, 318.
Harry’s loan to Lucius and his loan from Hermione are different from the transactions in his budget because the dollar sign, 318 loan and the dollar sign, 70 loan both created liabilities for someone. So, let’s keep track of the transactions that created a liability in a separate balance sheet:
Source of funds or use of funds | Amount |
---|---|
Loan to Lucius | minus, dollar sign, 70 (it is negative because this money left his possession) |
Loan from Hermione | plus, dollar sign, 318 (it is positive because this money came into his possession) |