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” |
+$1000$1000dollar sign, 1000 |
| Income earned from owl consultancy services |
+$200$200dollar sign, 200 |
| Money spent on dementor repellant |
−$1200−$1200minus, dollar sign, 1200 |
| Money spent paying for investment advice |
−$300−$300minus, dollar sign, 300 |
| Payment from Ron to borrow Harry’s wand |
+$50+$50plus, dollar sign, 50 |
| Allowance from Aunt Petunia |
+$2+$2plus, dollar sign, 2 |
| Harry’s balance |
−$248−$248minus, 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 $70$70dollar sign, 70. That means he also has a financial asset in the form of an I.O.U. from Lucius, but also $70$70dollar sign, 70 less money available to him. That means Harry has a total shortfall of cash of $248+$70=$318$248+$70=$318dollar sign, 248, plus, dollar sign, 70, equals, dollar sign, 318. As usual, his friend Hermione bails him out of trouble by loaning him $318$318dollar sign, 318.
Harry’s loan to Lucius and his loan from Hermione are different from the transactions in his budget because the $318$318dollar sign, 318 loan and the $70$70dollar 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 |
−$70−$70minus, dollar sign, 70 (it is negative because this money left his possession) |
| Loan from Hermione |
+$318+$318plus, dollar sign, 318 (it is positive because this money came into his possession) |
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