National Income Accounting

Topics: Gross domestic product, National accounts, Measures of national income and output Pages: 43 (12847 words) Published: December 20, 2011
<link rel="stylesheet" href=""> National Income Accounts
What is National Income Accounting?
National income accounting is a term which is applied to the description of the various types of economic activities that are taking place in the community in a certain institutional framework. In national income accounting, we are concerned with statistical classification of the economic activity so that we are able to understand easily and clearly the operation of the economy as a whole. In national income accounting the following distinctions are drawn between: (a) forms of economic activity, namely, production, consumption, and accumulation of wealth; (b) sectors or institutional division of the economy; and

(c) types of transactions, such as sales and purchases of goods and services, gifts, taxes, and other current transfers. In national income accounting, a transactor is supposed to keep a set of three accounts in which transactions are recorded: (i) In the first account, incomes and outgoings relating a productive activity of the transactor are brought together. The difference between the two shows the profit or gain. (ii) The second account seeks to show how this profit and any other income that accrues to the transactor are allocated to different uses. The excess of income over outlay is saving. (iii) The third account shows how this saving and any other capital funds are used to finance the capital expenditure or to give loans to other transactors. Since in an economy, there are numerous transactors, therefore, they are grouped into sectors. In a sector, accounts of a same type are consolidated. The‘sector accounts’ form the units in a system of national income accounting. Comparison of National Income Accounting and Individual Income Accounting: (a) Double entry book-keeping: Both national income accounting system and individual income accounting system are based on the method of double-entry book-keeping. For example, under individual income accounting, a cash sale is recorded as a debit in Cash Account and as a credit in Sales Account. Whereas, in national income accounting, the cash transactions are not separately presented. Cash balances are recorded in the capital transaction account. The difference is that the national income accounting does not record the second entry in detail. (b) Individual vs. collective individuals: Individual income accounts or private accounts relate to an individual businessman or a corporate firm. Whereas, the national income accounts are closely related to all the businessmen or corporate firms in the community. (c) Profit and loss account: Individual income accounts are usually presented in the form of a Profit and Loss Account or Income Statement which shows the flow of income and its allocation during a year. The Balance Sheet shows the stock of assets and liabilities at the end of the year. The Profit and Loss Account of a private businessman resembles in national income accounting to what is called the Appropriation Account. The only difference is that in private accounting, the profit often includes some elements of costs such as depreciation on plant and machinery and fees paid to the directors of the company. On the other hand, in national income accounting, these incomes are shown net. There is no counterpart at all of a Balance Sheet in national income accounting since there is a great difficulty in collecting such a huge bank of data accurately and completely especially on uniform basis. Income Statement of a Typical Firm

For the year ended on December 31, 2005
Debits| Rs.| Credits| Rs.|
To Sales Account(50,000 units @ Rs. 25)| 1,250,000| By Cost of Sales:WagesRentInterestProfit (residual)| 750,000150,000150,000200,000| Total| 1,250,000| Total| 1,250,000|
National Product Account 2004-05
(Millions of rupees)
Flow of Product| Rs.| Flow of Earning| Rs.|
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