Official Reserve Account – Meaning, Importance, and More
- Importance of Official Reserve Account. This account holds, stores and shows the foreign currency and other securities of the government. ...
- Relation with Balance of Payments. As said above, Official Reserve Account is linked to and is a part of the Balance of Payments. ...
- Components of Balance of Payments. ...
- Official Reserve Transactions. ...
- Final Words. ...
What does reserve account mean?
Reserve (accounting) In financial accounting, "reserve" always has a credit balance and can refer to a part of shareholders' equity, a liability for estimated claims, or contra-asset for uncollectible accounts. A reserve can appear in any part of shareholders' equity except for contributed or basic share capital.
What are the types of reserves in accounting?
What are Reserves and Surplus?
- Explanation. During the course of a year, a business comes across lots of unknown expenses, and so they build reserves in order to be able to meet such expenses.
- Types of Reserves and Surplus. ...
- Examples of Reserves and Surplus. ...
- Audit of Reserves and Surplus. ...
- Advantages. ...
- Disadvantages. ...
- Conclusion. ...
- Recommended Articles. ...
What is a reserve in accounting?
What is Reserve in Accounting
- Types of Reserves. • Capital reserves may or may not involve any receipts of cash. ...
- Reserves in the Balance sheet. Reserves in the Balance sheet are entered as liabilities and reflect funds set aside to pay future commitments.
- Difference Between Reserve and Provision: A reserve is a portion of profits set aside for a particular reason. ...
What does reserve assets mean?
Definition: Reserve assets consist of those external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate and/or for other purposes.
What is official reserve account class 12?
Class 12th. Answer : Official reserve transactions are the transactions made by the Central Bank which cause changes in its official reserves of foreign exchange. It takes effect in the foreign reserve of the country.
What are the official reserves?
The official reserve is a country's holdings of gold reserves, special drawing rights, and tradable foreign currency. 'Reserve account,' 'officials reserves' (plural), 'official reserve assets,' and 'international reserves' mean the same as 'official reserve. '
Which items does the official reserve account include?
This account, shows the monetary movements into and out of the country. And it includes all the transfer of financial capital and direct investments. In other words, it measures the changes in the asset ownership -domestic as well as foreign.
What is an official reserve asset?
The official reserve assets are assets denominated in foreign currency, readily available to and controlled by monetary authorities for meeting balance of payments financing needs, intervening in exchange markets to affect the currency exchange rate, and for other related purposes (such as maintaining confidence in the ...
Which currency is SDR?
The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity. A basket of currencies defines the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound.
What is official settlement account?
An official settlement account is used to track and account for international balance of payments between central banks. It is used to settle transfers of assets and global monetary reserves that circulate among nations' central banks.
What is meant by official reserve account on BoP?
The official reserve account, a subdivision of the capital account, is the foreign currency and securities held by the government, usually by its central bank, and is used to balance the payments from year to year.
What is official reserve account in balance of payment?
Official Reserve Account: The official reserve account is a part of the capital account, are the foreign currency and securities held by the central bank of a country and used to balance the payments from year-to-year. The reserves increase in case of a trade surplus and decrease when there is a trade deficit.
What is difference between BoT and BoP?
Balance of trade (BoT) is the difference that is obtained from the export and import of goods. Balance of payments (BoP) is the difference between the inflow and outflow of foreign exchange. Transactions related to goods are included in BoT. Transactions related to transfers, goods, and services are included in BoP.
Why are official reserve assets important?
Uses of Official Reserve Assets The central bank or other authorities can use these assets for: To fulfill the financing necessities of the balance of payments. For maintaining the trust in the currency and the economy of the country. In certain times it used to influence the prevailing foreign exchange rate.
Are reserves assets or liabilities?
A bank's reserves are considered part of its assets and are listed as such in its accounts and its annual reports.
What are official reserve transactions explain their importance in the balance of payments?
Official reserve transactions are the transactions made by the Central Bank which cause changes in its official reserves of foreign exchange. This happens only when an economy withdraws from its stock of foreign exchange reserves to finance deficit in its overall BOP.
What is the official reserve account?
Official Reserve Account: The official reserve account is a part of the capital account, are the foreign currency and securities held by the central bank of a country and used to balance the payments from year-to-year. The reserves increase in case of a trade surplus and decrease when there is a trade deficit.
What is reserve in finance?
A reserve is profits that have been appropriated for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth. Thus, funds designated as a reserve can actually be used for any purpose.
What is international reserve?
International reserves (or reserve assets in the balance of payments) are those external assets that are readily available to and controlled by a country's monetary authorities. A narrower definition for international reserves only includes foreign currency deposits and bonds.
What is the purpose of the Federal Reserve?
Central banks use their official reserves to balance their payments from year to year. When there is a trade surplus, for example, the official reserve increases. However, it shrinks when there is a trade deficit.
Why do central banks use their reserves?
Sometimes, central banks use their official reserves to intervene in the foreign exchange market. If the dollar is too strong, for example, the Fed might sell dollars to bring down its value. If a currency is too weak, the central bank will purchase its own currency.
What are the UK's international reserves?
According to the Bank of England: “The UK’s official holdings of international reserves comprise gold, foreign currency assets, IMF Special Drawing Rights, and the UK’s Reserve Tranche Position at the IMF.”.
How much was the reserve in 2000?
Since the beginning of this century, the official reserve assets of the United States have fluctuated. In 2000, they stood at $128.4 billion. They reached a peak of $527.37 billion in 2012 and then dropped to $407.22 in 2016. According to the Bank of England:
What is a tradable currency?
A tradable foreign currency is one we can purchase directly or legally outside the country that issues that currency. For example, the euro, US dollar, and pound sterling are tradable currencies. In other words, you can buy and sell them outside the eurozone, US, or UK.
Types of Official Reserve Assets
Official Reserve Assets include foreign exchanges, gold, SDRs (special drawing rights), and reserves with the IMF. These are assets that can be readily converted and used for payments.
Real World Example
During 2011 and 2015, the SNB (Swiss National Bank) decided to cap the exchange rate for the Swiss franc (CHF). This was done primarily to boost the exports as rising CHF wasn’t good for the exporters.
Final Words
Official Reserve Assets are very crucial for an economy. In a way, the amount of reserve assets a country has speaks a lot about its financial clout. Or, the more reserve assets a country has, the richer it is.
Sanjay Bulaki Borad
Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".
What is capital account?
The capital account records the change in foreign and domestic investments, government borrowing and private sector borrowing. When there is either a balance of payments deficit or surplus, inflows of reserve assets or outflows of reserve assets bring the ledger back into balance. This is recorded in the official settlement account.
What is an official settlement account?
An official settlement account is a special type of account used in international balance of payments (BoP) accounting to keep track of central banks' reserve asset transactions with one other.
Why do nations keep an eye on the official settlement account?
Nations keep an eye on the official settlement account to gauge their economic health in the global economy. If there are continual outflows of reserve assets for a country, it means that its competitiveness in producing exported goods is relatively weak, or it's business environment is not as attractive as that offered by other countries for direct foreign investment.
Official Reserve – Central Banks
Official Reserve – Exchange Rates
- Sometimes, central banks use their official reserves to intervene in the foreign exchange market. If the dollar is too strong, for example, the Fed might sell dollars to bring down its value. If a currency is too weak, the central bank will purchase its own currency. This increases demand for that currency, which subsequently raises its value compared to others. However, exchange rate i…
Video – Official Reserve
- This Khan Academyvideo explains why and how a country’s central bank would build foreign currency reserves.