In the Balance of Payments, an increase in foreign exchange reserves appears under which category?
Capital Account – Debit
In the Balance of Payments, transactions in assets and liabilities are recorded in the Capital Account, while trade in goods, services and income is recorded in the Current Account. Foreign exchange reserves are a financial asset, so any change in them is a capital-account entry.
By convention, an increase in a country's holdings of foreign assets, including a build-up of foreign exchange reserves, is recorded as a debit, because the country is acquiring (paying out for) an external asset, in the same way importing goods is a debit.
Therefore an increase in foreign exchange reserves is entered as a debit item in the Capital Account, not as a credit and not in the Current Account.
Hence, an increase in foreign exchange reserves appears under Capital Account – Debit.
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