II. OVERVIEW
C. Rules of accounting
1. Introduction
Terminology for the two sides of the accounts
| 2.54. | The SNA utilizes the term resources for the side of the current accounts where transactions which add to the amount of economic value of a unit or a sector appear. For example, wages and salaries are a resource for the unit or sector receiving them. Resources are by convention put on the right side. The left side of the accounts, which relates to transactions that reduce the amount of economic value of a unit or sector, is termed uses. To continue the example, wages and salaries are a use for the unit or sector that must pay them. |
| 2.55. | Balance sheets are presented with liabilities and net worth (the difference between assets and liabilities) on the right side and assets on the left. Comparing two successive balance sheets, one gets changes in liabilities and net worth and changes in assets. |
| 2.56. | The accumulation accounts and balance sheets being fully integrated, the right side of the accumulation accounts is called changes in liabilities and net worth and their left side is called changes in assets. In the case of transactions in financial instruments, the changes in liabilities are often referred to as (net) incurrence of liabilities and the changes in assets as (net) acquisition of financial assets. |
Double entry/quadruple entry
| 2.57. | For a unit or sector, national accounting is based on the principle of double entry, as in business accounting. Each transaction must be recorded twice, once as a resource (or a change in liabilities) and once as a use (or a change in assets). The total of transactions recorded as resources or changes in liabilities and the total of transactions recorded as uses or changes in assets must be equal, thus permitting a check of the consistency of the accounts. Economic flows that are not transactions have their counterpart directly as changes in net worth, by construction. This is shown in section D below (and also in chapter XII, which describes the other changes in volume of assets account and the revaluation account). |
| 2.58. | The implications of the double entry principle are easy to grasp in a number of cases: a household's purchase on credit of a consumer good will appear as a use under final consumption expenditure and as an incurrence of a liability under loans, for example. If this good is paid for in cash, however, the picture is less simple: the counterpart of a use under final consumption is now a negative acquisition of assets, under currency and deposits, for instance. Other transactions are even more complicated. Output of goods is recorded as a resource in the account of a producer, its counterpart among uses is recorded as a positive change in inventories. When the output is sold, there is a negative change in inventories - that is, a negative acquisition of assets - balanced by a positive acquisition of assets, for instance under currency and deposits. |
| 2.59. | In many instances, as explained earlier, the difficulty of seeing how the double entry principle applies is due to the fact that the categories of transactions in the System are compacted. |
| 2.60. | In principle, national accounts - with all units and all sectors - are based on a principle of quadruple entry, because most transactions involve two institutional units. Each transaction of this type must be recorded twice by the two transactors involved. For example, a social benefit in cash paid by a government unit to a household is recorded in the accounts of government as a use under the relevant type of transfers and a negative acquisition of assets under currency and deposits; in the accounts of the household sector, it is recorded as a resource under transfers and an acquisition of assets under currency and deposits. |
| 2.61. | The principle of quadruple entry does not imply that the relations between sectors (from whom to whom?) are directly shown in the accounts. Recording correctly the four transactions involved results in full consistency. |
| 2.62. | Although these accounting principles are the conceptual basis for the consistency of national accounts, national accounting cannot always take advantage of them in practice. The accounts of the nation are not kept in the same way as a business unit or government - that is, by actually recording all flows occurring in a given period. They rely on accounts of various units that are not always consistent, complete or even available. For household accounts in particular, other statistics such as those from household surveys have to be used. However, the quadruple entry principle remains fundamental. |
2. Time of recording
| 2.63. | One implication of the quadruple entry principle is that transactions, or other flows, when relevant, have to be recorded at the same point of time in the various accounts in question for both units involved. The same applies to stocks of financial assets and liabilities. |
| 2.64. | The general principle in national accounting is that transactions between institutional units have to be recorded when claims and obligations arise, are transformed or are cancelled - that is, on an accrual basis. Transactions internal to one institutional unit are equivalently recorded when economic value is created, transformed or extinguished. Generally speaking, all transactions, apart from their intrinsic nature, can always be viewed as dealing with economic value. |
| 2.65. | One has thus to distinguish carefully between a transaction and the corresponding cash movement which takes place, except for a transaction in kind, at a given point of time. Even when a transaction (a purchase/sale of a good, for example) and the payment/receipt are simultaneous, the two aspects exist. The purchaser is incurring a liability, the seller acquiring a claim as a counterpart of the delivery of the good. Then liability and claim are cancelled by the payment. In most cases there is a delay between the actual transaction and the corresponding payment/receipt. In principle, national accounts record actual transactions, not on a cash basis, but on an accrual basis. Conceptually they follow the same principle as business accounting. |
| 2.66. | If the principle is clear, its implementation is far from simple. Institutional units do not always apply the same rules. Even when they do, differences in actual recording may occur for practical reasons such as delays in communication. Consequently, transactions may be recorded at different times by the transactors involved, sometimes not even in the same accounting period. Discrepancies exist which national accounts must eliminate by after-the-fact adjustments. In addition, because the time at which a claim/liability arises is not always unambiguous, further implementation problems arise. The rules and conventions adopted in the System for particular transactions are specified in the relevant chapters(see also chapter III). |
3. Valuation
General principles
| 2.67. | Again, following the quadruple entry principle, a transaction must be recorded at the same value through all the accounts of both sectors involved. The same principle applies to assets and liabilities. It means that a financial asset and its liability counterpart have to be recorded for the same amount in the creditor and the debtor accounts. |
| 2.68. | Transactions are valued at the actual price agreed upon by the transactors. Market prices are thus the basic reference for valuation in the System. In the absence of market transactions, valuation is made according to costs incurred (non-market services produced by government) or by reference to market prices for analogous goods or services (services of owner-occupied dwellings). |
| 2.69. | Assets and liabilities are valued at current prices at the time to which the balance sheet relates, not at their original prices. Theoretically, national accounts are based on the assumption that assets and liabilities are continuously revalued at current prices, even if estimates are in fact made only periodically. The appropriate valuation basis for assets and liabilities is the price at which they might be bought in markets at the time the valuation is required. Prices observed in markets or estimated from observed market prices should preferably be used. Current prices may be approximated for balance sheet valuation in two other ways: by accumulating and revaluing transactions over time or by estimating the discounted present value of future returns expected from a given asset (see also chapter XIII). |
| 2.70. | Internal transactions are valued at current prices at the time these transactions occur, not at original prices. These internal transactions include entries in inventories, withdrawals from inventories, intermediate consumption and consumption of fixed capital. |
Methods of valuation
| 2.71. | Various methods of treating taxes on products, subsidies, and trade and transport margins in valuing transactions on products (goods and services) exist. For the sake of integrating the System, the same methods are followed in the institutional sector accounts and the central supply and use tables (see section D below). |
| 2.72. | The preferred method of valuation of output is at basic prices, although producers' prices may be used when valuation at basic prices is not feasible. The distinction is related to the treatment of taxes and subsidies on products. Basic prices are prices before taxes on products are added and subsidies on products are subtracted. Producers' prices include, in addition to basic prices, taxes less subsidies on products other than value added type taxes. This means, to be specific, that three valuations of output may be encountered: at basic prices, at producers' prices in the absence of value added type taxes, and at producers' prices in the presence of value added type taxes./1 |
| 2.73. | In the same set of accounts and tables, all transactions on the uses of goods and services (like final consumption, intermediate consumption, capital formation) are valued at purchasers' prices. Purchasers' prices are the amounts paid by the purchasers, excluding the deductible part of value added type taxes. Purchasers' prices are the actual costs to the users. |
| 2.74. | The various methods of valuing output, with intermediate consumption always at purchasers' prices, imply consequences for the content and uses of value added (the difference between output and intermediate consumption) by a producer or a sector or an industry. In the same set of accounts and tables, uses of value added at basic prices include, besides primary incomes to labour and capital, only taxes less subsidies on production other than taxes less subsidies on products; uses of value added at producers' prices include, in addition, taxes, less subsidies, on products other than value added type taxes (which means all taxes, less subsidies, on products/2 when value added type taxes do not exist). A complementary definition of value added is at factor cost, which excludes taxes on production of any kind. |
| 2.75. | When looking at the economy as a whole, that part of taxes on products (less subsidies) not included in value added is added to the sum of value added of all producers (either institutional sectors or industries) in order to reach the main aggregate of product and income generated in the economy. |
| 2.76. | Other methods of valuation may be used in other versions of the supply and use tables and symmetric input-output tables. In particular, valuation at basic prices may be used for output, when not already done in the central supply and use tables, and for uses of goods and services detailed by product. (In the latter case, an additional row for taxes, less subsidies, on products is introduced to get, for each type of use, the total at purchasers' prices.) Another alternative valuation of uses by product excludes trade and transport margins, the latter being directly channelled to the users. |
Volume measures and measures in real terms
| 2.77. | To this point, only current prices have been described. In addition, the System emphasizes calculation at constant prices, that is, use of the system(s) of prices which prevailed in a past period(s). The changes over time in the current values of flows of goods and services and of many kinds of assets can be decomposed into changes in the prices of these goods and services or assets and changes in their volumes. Flows or stocks at constant prices take into account the changes in the price of each item covered. They are said to be in volume terms. However, many flows or stocks do not have price and quantity dimensions of their own. Their current values may be deflated by taking into account the change in the prices of some relevant basket of goods and services or assets, or the change in the general price level. In that case, flows or stocks are said to be in real terms (at constant purchasing power). For example, the System provides for the calculation of income in real terms. |
| 2.78. | Inter-spatial comparisons raise similar but even more complex problems than inter-temporal comparisons. The additional difficulty is due mainly to the fact that many countries are involved. Purchasing power parities (the ratios between prices prevailing in various countries) are calculated and indicators of relations in volume between various groups of items and national aggregates for different countries are obtained by using a great many elementary calculations at prices constant-in-space. |
| 2.79. | Both inter-temporal and inter-spatial measures are discussed in chapter XVI. |
4. Consolidation and netting
| 2.80. | Consolidation may cover various accounting procedures. In general, it refers to the elimination, both from uses and resources, of transactions which occur between units when the latter are grouped and to the elimination of reciprocal financial assets and liabilities. |
| 2.81. | For institutional units, normally only transactions with other institutional units are recorded. However, when it is necessary to give meaningful measures of economic phenomena, the System records internal flows. This is done for consumption of fixed capital and for output used for own final uses. As regards internal intermediate uses, the System follows a convention: deliveries among technical units of an establishment are consolidated with the corresponding output, but deliveries among establishments belonging to the same enterprise are not. Consequently, output and intermediate consumption, once measured at the establishment level, are not modified whatever level of aggregation is used. |
| 2.82. | For sub-sectors or sectors, flows between constituent units are not consolidated as a matter of principle. However, consolidated accounts may be built up for complementary presentations and analyses. This may be useful, for example, for the government sector as a whole, thus showing the net relations between government and the rest of the economy. Even then, transactions appearing in different accounts are never consolidated to avoid changing the balancing items. |
| 2.83. | Accounts for the total economy, when fully consolidated, give rise to the rest of the world account (external transactions account). |
| 2.84. | Consolidation must be distinguished from netting. For current transactions, netting refers, outside the context of consolidation of various units, to offsetting uses against resources. The System does this only in a few specific presentations; for example, taxes on products may be shown net of subsidies on products. For changes in assets or changes in liabilities, netting may be envisaged in two ways. First, various types of changes in assets (for example, entries in inventories and withdrawals from inventories) or various types of liabilities (for example, incurrence of a new debt and redemption of an existing debt) are netted. Secondly by changes in financial assets and changes in liabilities (or, in the balance sheet, financial assets and liabilities themselves) related to a given financial instrument are netted. As a matter of principle, the System discourages netting beyond the degree shown in the classifications of the System. Netting financial assets (changes in financial assets) against liabilities (changes in liabilities) is especially to be avoided. Netting is discussed in chapters III and XI. |
Notes
/1 The way producers' prices are defined means that value added type taxes are never considered in the System to be costs against production but levies on uses: producers are deemed to collect, on behalf of government, taxes which are not part of their own turnover. The use of basic prices might be interpreted as extending this scheme to all taxes on products Business accounting practices may vary from one country to another or within a given country. The trend seems to be toward the recording of taxes on products separately from turnover.
/2 However, taxes and subsidies on imports are never channeled through the accounts of producers.
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