Characteristics of National Income Accounting
1. Sector wise preparation of accounts on the double entry basis like private accounts.
2. National income accounting establishes intersect oral relationship.
3. National income accounting establishes a detailed statistical statement of various sectors.
4. On the basis of national income accounting the accounting, relationship among different sectors is established.
5. It involves classification of the process of production among different categories.
The principal forms of economic activity are production, consumption, capital accumulation, Govt, transactions and transactions with the rest of the world. These are the components of social or national income accounting. If exports and imports of a country concerning these five activities are shown in the form of accounts, they show a network of flows representing the basic structure of the economy. These flows are expressed in money terms. We classify these flows as follow.
(a) Production account: –
The production sector means the business sector of the economy. It is comprised of all firms of productive activities like manufacturing, trading etc. It covers public and private companies, proprietors and partnerships, state owned undertaking etc. As the productive activity takes place here, all types of payments from it to other sectors.
(b) Consumptions account: –
The consumption account refers to the payments and receipts of the household sector. The household sectors consist of consumers and non-profit making institutions such as clubs and associations. The consumption account shows the expenditure of households in buying goods and services from the business sector to satisfy their wants. The consumers and private individuals as household receive income in the form of wages, salaries, profit, rent and interest etc.
(c) Government account: –
The Govt, account reflects the outflows and inflows of the Govt, sector. The Govt, sector is comprised of all public authorities – Centre, state and local authorities. The income of the Govt is largely derived from taxes, direct and indirect and social security contribution, from business and personal sector. The expenditure side includes purchases of direct services, purchase of goods and services from business sector and from abroad. It includes expenditure on transfer payments and interest payments to individual and institutional bond holders of the public debt.
(d) Capital account:-
The capital account show that saving equals domestic and foreign investment. Saving is invested in fixed capital and inventories with in the country.
(e) Foreign account: –
Foreign account shows the transactions of the country with the rest of the world. It includes, not only the net investments abroad through exports and imports but also includes borrowings not from the domestic economy by the rest of the world but also net borrowing by the home country. This account covers international movements of goods and services and transfer payments and corresponds to the current account of the international balance of payments.
The five account system relates to flows of the economy in terms of production, consumption, Govt, transactions, capital accumulation, and transactions with the rest of the world. The accounts based on the five account system are called functional accounts as they are based on classification of transactions according to their functions.