Simplified sequence of accounts

Presentation

The accounts of an economic agent present its transactions, i.e. the flows that it decides or accepts and that impact on the level or the composition of its wealth.

For an economic agent, there are only two ways for increasing its wealth:

• to produce goods and services,
• to receive transfers from other economic agents.

During the reference period, the economic agent can use this wealth in three different ways:

• consuming it, i.e. destroying it,
• transferring it to other agents,
• accumulating it, i.e. storing it for a use in next periods.

Accumulation can be negative since an agent can use the wealth he had accumulated during the previous periods.

Wealth is composed of assets, i.e. of stores of values, and of liabilities, i.e. of debts that are deducted from wealth. An agent can modify the composition of its wealthe in two different ways:

• exchanging some assets against other assets. For example, a firm that sells a product exchanges a produced asset against a financial asset;
• borrowing, i.e. increasing its liabilities, or clearing its debts, i.e. decreasing its liabilities, with as counterpart an increasing or a decreasing of its assets.

National accounts do not record the purchases and the sales of assets but only their changes during the period.

The account of an economic agent presents the origin and the use of its assets. In its simplest form, it can be presented as follows:

Consumption is broken down in two parts:

• intermediate consumption that corresponds to goods and services destroyed during the production process of other goods and services;
• final consumption that corresponds to goods and services destroyed for satisfying the needs of households.

Transfers are broken down in several categories:

• Current transfers
  • Primary distribution of income
  • Secondary distribution of income
• Capital transfers

Assets are broken down in the following categories:

• Non-financial assets
  • Produced assets
  • Non produced assets
• Financial assets

The account of an economic agent can be presented as follows:

For the needs of the economic analysis, the account of the agent is broken down in sub-accounts that make appear balance items. These balance items do not modify the global balancing since they appear both in the left column of each sub-account and in the right column of the following sub-account:

Production account

The production account is the first sub-account, its balance item is value added:

If intermediate consumption appears in uses, the value added is net, otherwise it is gross.

Primary distribution of income account

The primary distribution of income account includes value added and the primary income received in resources, the primary income paid and its balance item, the balance of primary income, in uses.

The primary income is composed of:

• Compensation of employees
• Other taxes on production
• Other subsidies on production
• Property income:
  • Interests
  • Distributed income of corporations
  • Reinvested earnings on direct foreign investment
  • Property income attributed to insurance policyholders
  • Rent

The primary distribution of income account is broken down in two sub-accounts: the generation of income account and the allocation of primary income account.

Generation of income account

The generation of income account includes, in resources, the value added in resources and, in uses, the flows that can be considered as costs of production. Its balancing item is the operating surplus for the corporations and the mixed income for the households. The generation of income accounts is as follows:

When the value added is gross, the operating surplus is gross, when the value added is net, the operating surplus is net.

Allocation of primary income account

The next sub-account is the allocation of primary income account. In resources appear the operating surplus; the mixed income; the primary incomes considered as production costs in the previous sub-account; and the property income received. In uses appears the property income paid.

The balance of primary income can be gross or net.

The allocation of primary income account is not the same for all sectors. For corporations, it is as follows:

For general government, the allocation of primary income account is as follows:

The allocation of primary income account of general government also includes in resources taxes and subsidies on products that do not come from the generation of income account but from the goods and services account.

For households, it is as follows:

Secondary distribution of income account

The following sub-account is the secondary distribution of income account, it shows how the redistribution transactions impact on the income of the economic agents.

The disposable income can be gross or net. The secondary distribution of income account is not the same for all sectors. For corporations, it is as follows:

Social contributions and benefits in this account are those of firms that give social contributions to their employees.

For general government, the secondary distribution of income account is as follows:

For households, it is as follows:

The social contributions that appear in resources and the social benefits that appear in uses in this account are those of unincorporated enterprises that give social benefits to their employees.

Redistribution of income in kind account

For general government and households, the redistribution of income in kind account calculates the adjusted disposable income that takes into account the social transfers in kind. For general government, it is as follows:

For households, the redistribution of income in kind is as follows:

Use of income account

The use of income account shows how the disposable income is used for consumption and for saving. Saving can be gross or net. For corporations, this account is as follows:

Adjustment for the change in net equity of households in pension fund reserves is necessary since pension funds are treated in non-financial accounts like social security schemes that receive and pay transfers, i.e. transactions that do not create assets or liabilities, while they are treated in financial accounts like financial institutions, the pension funds reserves being considered as assets for households.

For general government and households, the use of income account has two versions corresponding to the two different definitions of final consumption, i.e. the final consumption expenditure and the actual final consumption. The use of disposable income account calculates saving as the difference between disposable income and final consumption expenditure. For general government and households it is as follows:

The use of adjusted disposable income calculates saving as the difference between adjusted disposable income and actual final consumption. For general government and households, it is as follows:

The existence of two series of accounts is the consequence of the recording of individual consumption expenditure of general government that is paid by government but benefits to identifiable households. Two options are possible:

• this expenditure is included in the final consumption of general government and does not appear in the households accounts;
• this expenditure is considered as a transfer from general government to households. This transfer called "social transfers in kind" is deducted from the disposable income of general government and its final consumption to be added to the disposable income and to the final consumption of households.

The first option corresponds to the secondary distribution of income account associated with the use of disposable income account, the second option corresponds to the redistribution of income in kind account associated with the use of adjusted disposable income account.

For general government we have:

Final consumption expenditure of general government
= Actual final consumption
+ Social transfers in kind

And for households:

Final consumption expenditure of households
= Actual final consumption
− Social transfers in kind

The use of disposable income shows how the disposable income is used for final consumption expenditure and saving:

Social transfers in kind are introduced to obtain the adjusted disposable income and the actual final consumption. In the account of households, the final consumption expenditure is replaced by the difference between the actual final consumption and the social transfers in kind; in the account of general government the final consumption expenditure is replaced by the sum of the actual final consumption and the social transfers in kind:

And finally:

Capital account

The capital account shows how economic agents use their saving and capital transfers they have received to acquire non-financial assets. It is the same for all sectors:

The consumption of fixed capital should be deducted only when saving is net, when saving is gross the consumption of fixed capital should not be deducted.

Financial account

The financial account shows the acquisition less the disposal of financial assets by economic agents and the increase in their liabilities. Its balancing item is also the net borrowing / net lending. In a simplified form, it is as follows:

Other changes in assets accounts

Some events that an economic agent does not control can also impact on the level of its wealth. In national accounts, these events are classified in two categories:

• other changes in volume of assets
• holding gains and losses

Each of these two categories corresponds to an account.

Other changes in volume of assets accounts

Revaluation account

Balance sheet

The balance sheet presents the value of assets and liabilities of economic agents, their balancing item is the net worth. An opening balance sheet and a closing balance sheet are presented.

This text only reflects the opinion of its author: Francis Malherbe