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ERRORS AND OMISSIONS

Discuss ERRORS AND OMISSIONS within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; ERRORS AND OMISSIONS Errors and omissions is a “statistical residue.” It is used to balance the statement because in practice ...

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Abhijeet S
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ERRORS AND OMISSIONS - September 13th, 2010

ERRORS AND OMISSIONS


Errors and omissions is a “statistical residue.” It is used to balance the statement because in practice it is not possible to have complete and accurate data for reported items and because these cannot, therefore, ordinarily have equal entries for debits and credits.


The entry for net errors and omissions often reflects unreported flows of private capital, although the conclusions that can be drawn from them vary a great deal from country to country, and even in the same country from time to time, depending on the reliability of the reported information. Developing countries, in particular, usually experience great difficulty in providing reliable information.


Errors and omissions (or the balancing item) reflect the difficulties involved in recording accurately, if at all, a wide variety of transactions that occur within a given period of (usually 12 months). In some cases there is such large number of transactions that a sample is taken rather than recording each transaction, with the inevitable errors that occur when samples are used.


In others problems may arise when one or other of the parts of a transaction takes more than one year: for example wit a large export contract covering several years some payment may be received by the exporter before any deliveries are made, but the last payment will not made until the contract has been completed.


Dishonesty may also play a part, as when goods are smuggled, in which case the merchandise side of the transaction is unreported although payment will be made somehow and will be reflected somewhere in the accounts. Similarly the desire to avoid taxes may lead to under-reporting of some items in order to reduce tax liabilities.


Finally, there are changes in the reserves of the country whose balance of payments we are considering, and changes in that part of the reserves of other countries that is held in the country concerned.


Reserves are held in three forms: in foreign currency, usually but always the US dollar, as gold, and as Special Deposit Receipts (SDR’s) borrowed from the IMF. Note that reserves do not have to be held within the country. Indeed most countries hold a proportion of their reserves in accounts with foreign central banks.


The changes in the country’s reserves must of course reflect the net value of all the other recorded items in the balance of payments. These changes will of course be recorded accurately, and it is the discrepancy between the changes in reserves and the net value of the other record items that allows us to identify the errors and omissions.
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