An Introduction to the 

National Income and Product Accounts 

Methodology Papers: U.S. National Income and Product Accounts 

U.S. DEPARTMENT OF COMMERCE 

Carlos M. Gutierrez 

Secretary 

ECONOMICS AND STATISTICS ADMINISTRATION 

Cynthia A. Glassman 

Under Secretary for Economic Affairs 

BUREAU OF ECONOMIC ANALYSIS 

J. Steven Landefeld 

Director 

Rosemary D. Marcuss 

Deputy Director 

September 2007 www.bea.gov 
Acknowledgments
 
 

Part I, “Overview of the NIPAs,” was prepared by Stephanie H. McCulla, an Economist in the National 

Income and Wealth Division at the Bureau of Economic Analysis (BEA). 

Part II, “Underlying Economic Accounts”; Part III, “Economic Accounts for Sectors”; and Part IV, 

“NIPA Summary Accounts”; were prepared by Charles Ian Mead, an Economist in the Office of the 

Director at BEA. 

Brent R. Moulton, Associate Director for National Economic Accounts at BEA, provided overall 

supervision for the preparation of this project. 

Preface

This paper provides a comprehensive explanation of the conceptual basis and framework of the U.S. 

national income and product accounts (NIPAs). It describes the structure and purpose of the U.S. 

economic accounts, discusses the relationship between business and financial accounting and national 

economic accounting, and presents a derivation of the seven NIPA summary accounts from 

generalized production, income and outlay, and capital accounts for each sector of the economy. 

This paper updates and replaces “An Introduction to National Economic Accounting” (MP1), which 

was published in March 1985. 

Comments about this paper are invited. Please contact the BEA National Economic Accounts 

Directorate, 1441 L St. NW, BE–6, Washington, DC 20230 or by e-mail at <GDPniwd@BEA.gov>. 

i 
An Introduction to the National Income and Product Accounts
 

THE national income and product accounts (NIPAs) produced by the Bureau of Economic Analysis (BEA) 

have become a mainstay of modern macroeconomic analysis for the U.S. economy. In fact, the Commerce 

Department in 2000 named the NIPAs, and their marquee measure, gross domestic product (GDP), “its achievement of the century.”1

 Because these accounts provide a detailed picture of economic activity at a given time, as 

well as a consistently defined series of measures over time, they are indispensable to researchers, forecasters, government officials, academics, and investors who use them for a wide array of academic, public policy, and other 

purposes. 

Given the importance of the NIPAs, users often seek a detailed explanation of the concepts that underlie them. 

The goal of this methodology paper is to present the conceptual basis and framework of the U.S. NIPAs.2

 Specifically, the paper demonstrates how the seven accounts that summarize the NIPAs are derived from conventional 

accounting statements—in particular, the balance sheet, income statements, and the statement of cash flow familiar to business accounting. In deriving the summary accounts, the paper also illustrates how they reflect the 

activity occurring within the entire economy.3 

The rest of this paper is organized as follows: 

I. Overview of the NIPAs: A look at what these accounts measure, a discussion of the larger system of 

national economic accounts into which the NIPAs fit, and a look at the key concepts underlying the 

NIPA estimates .............................................................................................................................................Page 2 

II. Underlying economic accounts: A look at the theoretical derivation of economic accounts for a 

representative business firm from familiar financial accounting statements ...........................................Page 6 

III. Economic accounts for sectors: A discussion of how economic accounts are derived for each sector of the economy—household, business, and government—from the theoretical economic accounts 

derived in section II ..................................................................................................................................Page 14 

IV. NIPA summary accounts: A discussion of the derivation of the NIPA summary accounts from the 

theoretical economic accounts for each sector .........................................................................................Page 22 

1. See “GDP: One of the Great Inventions of the 20th Century,” SURVEY OF CURRENT BUSINESS 80 (January 2000): 6–14. 

2. New users of the NIPAs may find it beneficial to first review “Measuring the Economy: A Primer on GDP and the National Income and Product 

Accounts” on <www.bea.gov>. 

3. Information on the data and estimating methods underlying the NIPAs is available in component methodologies available on BEA’s Web site at 

<www.bea.gov>. 

1
 

2 

I. Overview of the NIPAs
 
 
 

T HE NIPAs are a set of economic accounts that 

provide detailed measures of the value and composition of national output and the incomes generated 

in the production of that output. Essentially, the NIPAs 

provide a detailed snapshot of the myriad transactions 

that make up the economy—buying and selling goods 

and services, hiring of labor, investing, renting property, paying taxes, and the like. More specifically, the 

seven summary accounts of the NIPAs simplify both 

the transactors and transactions in the economy. The 

transactors of the domestic economy are grouped into 

three distinct groups, or sectors—persons, businesses, 

and government; a fourth sector for the rest of the 

world is added to cover transactions between the Nation and foreigners. The seven summary accounts of 

the NIPAs show the contribution of each sector to the 

output of the economy, their income and outlays, and 

their saving and investment. 

The best-known NIPA measure is GDP, which is defined as the market value of the goods and services 

produced by labor and property located in the United 

States. The NIPAs calculate GDP as the sum of familiar 

final expenditure components: Personal consumption 

expenditures, private investment, government spending (consumption and investment) and net exports. 

However, GDP is just one of many economic measures 

presented in the NIPAs, which include seven summary 

accounts and nearly 300 tables of supporting data. 

National Economic Accounts System 

The NIPAs are part of an integrated system of national 

economic accounts that also includes the industry accounts and the flow of funds accounts. BEA’s industry 

accounts consist of the input-output (I-O) accounts, 

which trace the flow of goods and services among industries in the production process and which show the 

value added by each industry and the detailed commodity composition of national output, and the GDP 

by industry accounts, which measure the contribution 

of each private industry and of government to GDP. 4 

4. See U.S. Bureau of Economic Analysis, “Concepts and Methods of the 

U.S. Input-Output Accounts,” September 2006, at <www.bea.gov/bea/ 

mp.htm>; and see Brian C. Moyer, Mark A. Planting, Mahnaz Fahim 

Nader, and Sherlene K.S. Lum, “Preview of the Comprehensive Revision of 

the Annual Industry Accounts: Integrating the Annual Input-Output 

Accounts and the Gross-Domestic-Product-by-Industry Accounts, SURVEY 

84 (March 2004): 38–51. 

The Federal Reserve Board’s flow of funds accounts 

record the value of tangible and financial assets acquired and the value of liabilities incurred throughout 

the U.S. economy, and the sources of the funds used to 

acquire the assets.5 

In addition, BEA prepares two other sets of U.S. 

economic accounts: The international accounts, which 

consist of the international transactions (balance of 

payments) accounts and the international investment 

position accounts; and the regional accounts, which 

consist of the estimates of GDP by state, of state personal income, and of local area personal income. Finally, the Bureau of Labor Statistics prepares estimates 

of productivity for the U.S. economy (which are partially based on estimates of GDP). Altogether, the system of U.S. economic accounts presents a coherent, 

comprehensive, and consistent picture of U.S. economic activity. 

An internationally accepted conceptual framework 

for these accounts is found in the System of National 

Accounts 1993 (SNA). The SNA provides a set of 

guidelines for national statistical offices compiling national economic accounts. Along with national accountants from many countries, BEA actively 

participated in developing these guidelines. 

Many of the major improvements made to the 

NIPAs in recent years are consistent with the guidelines 

provided by the SNA. These include the adoption of 

chain-type quantity and price indexes, the capitalization of software, and the recognition of the implicit 

services provided by commercial banks. BEA is currently participating in the international effort to update these guidelines to take account of changes in the 

economic environment.6 

The remainder of this section discusses the concepts 

underlying the NIPAs. 

5. See U.S. Board of Governors of the Federal Reserve System, Guide to the 

Flow of Funds Accounts, Board of Governors, Washington, D.C., 2006; and 

see Albert M. Teplin, “The U.S. Flow of Funds Accounts and Their Uses,” 

Federal Reserve Bulletin (July 2001): 431–441. 

6. See Commission of the European Communities, International Monetary Fund, Organization for Economic Co-operation and Development, 

United Nations, and the World Bank, System of National Accounts 1993 

(Brussels/Luxembourg, New York, Paris, and Washington, DC, 1993). For 

more on the SNA and the relationship between it and the NIPAs, see 

Charles Ian Mead, Karin E. Moses, and Brent R. Moulton, “The NIPAs and 

the System of National Accounts,” SURVEY 84 (December 2004): 17–32. 
Methodology Paper 1 3 

Estimating Concepts and Conventions 

Production boundary. One of the fundamental questions that must be addressed in preparing national 

economic accounts is how to define the production 

boundary—that is, what parts of the myriad human 

activities are to be included in or excluded from the 

measure of the economy’s production. According to 

the SNA, “Economic production may be defined as an 

activity carried out under the control and responsibility of an institutional unit that uses inputs of labor, 

capital, and goods and services to produce outputs of 

goods or services. There must be an institutional unit 

that assumes responsibility for the process and owns 

any goods produced as outputs or is entitled to be 

paid, or otherwise compensated, for the services 

provided.” 7 

Under this definition, certain natural processes may 

be included in or excluded from production, depending upon whether they are under the ownership or 

control of an entity in the economy. For example, the 

growth of trees in an uncultivated forest is not included in production, but the harvesting of the trees 

from that forest is included. 

The general definition of the production boundary 

may then be restricted by functional considerations. In 

the SNA (and in the U.S. accounts), certain household 

activities—such as housework, do-it-yourself projects, 

and care of family members—are excluded, partly because by nature these activities tend to be self-contained and have limited impact on the rest of the 

economy and because their inclusion could diminish 

the usefulness of the accounts for long-standing analytical purposes, such as business cycle analysis.8 

In the NIPAs, the production boundary is further 

restricted by practical considerations about whether 

the productive activity can be accurately valued or 

measured. For example, illegal activities, such as gambling and prostitution in some states, should in principle be included in measures of production. However, 

these activities are excluded from the U.S. accounts because they are by their very nature conducted out of 

sight of public scrutiny and so data are not available to 

measure them. 

Finally, the production boundary is sometimes altered in order to accommodate innovations and structural changes in the economy. For example, in the 1999 

comprehensive revision of the NIPAs, the value of U.S. 

production was increased by a change in definition 

that recognized business and government expenditures 

for software as fixed investment rather than as intermediate purchases for business and as consumption 

7.SNA 1993: paragraph 6.15. 

8. SNA 1993, paragraph 6.22. 

expenditures for government. 9 

Market value. Goods and services in the NIPAs are 

measured at market prices; the value of output is equal 

to the market price of the good or service times the 

quantity of the good or service produced during the 

year. In cases where market prices do not fully reflect 

the value of a good or service or where services are 

provided without an actual exchange, the value of the 

good or service produced may be “imputed” from similar market transactions, as described below. In cases 

where there are no similar market transactions available to impute a value, such as for goods or services 

that are provided for free (or at insignificant prices) by 

government and nonprofit institutions, the market 

price is estimated based on the costs of production. 

Imputations. Imputations are made to include in 

the accounts the value of certain goods and services 

that have no observable price and are often not associated with any observable transaction. 10 

For example, in their role as an intermediary between borrowers and lenders, banks provide services 

for which they do not charge an explicit price. However, they are compensated for these services through 

the payment of higher interest rates by borrowers and 

the receipt of lower interest rates by savers. To keep 

GDP invariant to whether or not a price is explicit or 

implicit, the value of the service reflected by such exchanges is imputed. Imputations are also made to keep 

GDP invariant to institutional arrangements. For example, unlike the provision for payment of housing 

services to a renter by a landlord, the provision of 

housing services to an occupant that owns the housing 

does not involve an exchange between two or more 

transactors. However, excluding the value of such services would cause variations in GDP that would depend only on variations in institutional arrangements. 

Therefore, the NIPAs include an imputation of the 

value of the services provided by owner-occupied 

housing.11 

Final versus intermediate products. In the NIPAs, 

production represents unduplicated output. That is, 

GDP is designed to avoid double counting the value 

of goods and services that are inputs into the production of other goods and services and that are not 

used in future production. These intermediate inputs 

are already reflected in the market value of the final 

9. See Brent R. Moulton, Robert P. Parker, and Eugene P. Seskin, “Preview 

of the 1999 Comprehensive Revision of the National Income and Product 

Accounts: Definitional and Classificational Changes,” SURVEY 79 (August 

1999): 8–11. 

10. The SNA’s definition of an imputation is restricted to estimates of 

goods and services for which there is no observable exchange. Estimates for 

which there is an observable exchange but no observable price are referred 

to simply as estimates. See paragraphs 1.72–1.75 and 3.34 of the SNA. 

11. The imputations in the NIPAs are presented in NIPA table 7.12. 
4 

product and are therefore excluded so that the measure 

of output is an unduplicated total. This is done using 

either the final expenditures approach or the value 

added approach, as described below. 

Alternative approaches to measuring GDP. GDP 

measures output as the “market value of final goods 

and services”—that is, as the sum of personal consumption expenditures, gross private domestic investment, government consumption expenditures and 

gross investment, and net exports of goods and services. This is known as the “expenditures” or “product 

side” approach to measuring GDP. Another way to 

measure GDP is as the sum of the charges generated in 

the production of the final goods and services. Because 

the market price of a final good or service reflects all 

the charges associated with producing that good or 

service, an “income-side” measure of output, gross domestic income (GDI), can be derived as the sum of the 

charges against production. Specifically, GDI is measured as the sum of compensation of employees (the 

return to labor), taxes on production less subsidies (a 

nonincome charge against production), net operating 

surplus (the net return to capital and entrepreneurship), and consumption of fixed capital (the using up 

of capital). 

In theory, GDP and GDI are equal. In practice, the 

differences in the data used to derive the two measures 

lead to a discrepancy. This “statistical discrepancy” is 

defined in the NIPAs as GDP less GDI. Because the 

source data used to derive product-side measures of 

output are based on more comprehensive surveys and 

censuses, BEA considers them more reliable. Therefore, the statistical discrepancy appears as a component on the income side of the account. 

Another way to measure output, used by BEA’s I-O 

accounts, is known as the “value added” approach. In 

these accounts, value added is defined as the difference 

between an industry’s total output—that is, its sales 

plus the change in inventories arising from production—and its intermediate purchases from other industries. When value added is aggregated across all 

industries in the economy, industry sales to and purchases from each other cancel out, and the remainder 

is industry sales to final users, or GDP.12 

Geographic coverage. In the NIPAs, and in the I-O 

accounts, the “U.S. estimates” cover the 50 states and 

the District of Columbia. This treatment aligns GDP 

with other U.S. statistics, such as population and employment. Transactions between the United States and 

Puerto Rico, the U.S. territories, and the Northern 

Mariana Islands are included in the “rest-of-the12. In the I-O accounts, “all industries” includes government industries 

(such as the U. S. Postal Service) and certain “special industries” (such as 

owner-occupied housing). 

Methodology Paper 1 

world” sector.13 

In the NIPAs, a distinction is made between “domestic” measures and “national” measures. Domestic 

measures cover activities that take place within the 

geographic borders of the United States. For example, 

GDP measures the value of goods and services produced by labor and capital located in the United States. 

In contrast, national measures cover activities that are 

performed using resources supplied by U.S. residents.14 

For example, gross national product (GNP) measures 

the value of goods and services produced by labor and 

capital supplied by U.S. residents. Thus, for an assembly plant that is owned by a U.S. auto company and located in Great Britain, a portion of the value of its 

output is included in GNP, but none of its output is included in GDP. And, for an assembly plant that is 

owned by a Japanese auto company and located in the 

United States, all of its output is included in GDP, but 

only a portion of its output is included in GNP. 

Capital, investment, and depreciation. Economic 

production as defined above covers all final goods and 

services produced during a given period. Nondurable 

goods and services are generally consumed fully within 

a year. In contrast, durable goods—such as equipment 

and software—and structures provide services over 

longer periods of time. In the NIPAs, purchases of new 

durable goods and structures by businesses or government for use in production are treated as gross fixed 

investment, as are purchases of new residential housing. Purchases of durable goods by individuals, on the 

other hand, are treated as consumption in the NIPAs, 

rather than as investment, in accordance with the 

NIPA convention that nonmarket household production is outside the scope of GDP. 15 

Both consumption and investment contribute to 

GDP in the NIPAs, but the distinction is important 

because investment implies a stock of fixed assets, 

or capital, which in turn implies depreciation, or a 

13. However, in BEA’s international transactions accounts, Puerto Rico, 

the U.S. territories, and the Northern Mariana Islands are treated as part of 

the United States. See NIPA table 4.3B, “Relation of Foreign Transactions in 

the National Income and Product Accounts to the Corresponding Items in 

the International Transactions Accounts.” 

14. “U.S. residents” includes individuals, governments, business enterprises, trusts, associations, nonprofit organizations, and similar institutions 

that have the center of their economic interest in the United States and that 

reside or expect to reside in the United States for 1 year or more. (For example, business enterprises residing in the United States include U.S. affiliates 

of foreign companies.) In addition, U.S. residents include all U.S. citizens 

who reside outside the United States for less than 1 year and U.S. citizens 

residing abroad for 1 year or more who meet one of the following criteria: 

Owners or employees of U.S. business enterprises who reside abroad to further the enterprises’ business and who intend to return within a reasonable 

period; U.S. Government civilian and military employees and members of 

their immediate families; and students who attend foreign educational 

institutions. 

15. Households are treated as businesses for the purpose of recording the 

ownership of and investment in housing. 
Methodology Paper 1 5 

decline in the value of the stock of capital over 

time.16 

More specifically, depreciation, or the consumption 

of fixed capital, is defined as the deductions from the 

capital stock over the period due to age, wear and tear, 

accidental damage, and obsolescence. Thus, depreciation is a charge against production—that is, it reflects 

an amount that would need to be set aside to eventually replace fixed assets as they are used up in the production process—and is therefore a component of the 

NIPAs income-side measure of output. Its inclusion in 

GDI ensures that the measure fully reflects the incomeside value of final goods and services, but it also suggests that the measure overstates the capabilities of the 

16. BEA prepares separate accounts for fixed assets and consumer durables, available at <www.bea.gov>. In these accounts, purchases of consumer 

durables are treated as investment in assets, and these assets depreciate over 

time. BEA’s use of the term “capital” in reference to this stock of fixed assets 

is different from the conventional use of the term to refer to financial holdings. 

economy to produce goods and services for consumption or to add to the capital stock. Thus, “net” measures that are provided in the NIPAs—that is, measures 

that exclude depreciation, such as net domestic product (NDP) and net domestic investment—are preferred for many analyses. Nevertheless, GDP remains 

the most commonly cited statistic of the overall level of 

economic activity. 

Inventories. A key component of investment, and 

thus GDP, is the change in private inventories, which 

reflects the value of goods that have been produced but 

not yet sold. For a given period, additions to inventories reflect production in that period and so are included in GDP, while withdrawals from inventories 

reflect production in past periods and so are excluded 

from GDP. 

In the NIPAs, additions to, less withdrawals from, 

inventories is measured as ending period less beginning period inventories and recorded as a single item, 

“change in inventories.” 
6 

II. Underlying Economic Accounts
 
 

MANY of the important concepts that are used in 

the NIPAs can be understood by relating a theoretical set of economic accounts for a business firm to 

its financial statements. This section will briefly review 

fundamental accounting principles and common financial statements before illustrating how they relate 

to the NIPAs. 

Fundamental Accounting Principles 

The formal practice of financial accounting has a much 

longer history than that of national economic accounting.17 Thus, it is no surprise that national economic accounting is based on many of the same fundamental 

principles that were first adopted in financial accounting. However, differences between the two fields still 

exist as each serves a separate purpose. 

The purpose of financial accounting is to provide a 

set of financial statements that convey information on 

the financial position, the results of operations, and 

the manner in which cash flows through an individual 

business. The financial position includes the resources 

available to a business (assets), the claims of creditors 

on these resources (liabilities), and the claims of business owners on these resources (owners’ equity). The 

results of operations include the income received by a 

business (revenue), the costs incurred while earning 

this income (expenses), and the profits earned by a 

business (net earnings). 

One of the most fundamental principles used in 

both financial and national economic accounting is 

double-entry bookkeeping. In double-entry bookkeeping, activities that affect the resources available to 

a business are reflected at least twice in a general ledger: At least once on the right side as a source of financing (credit) and at least once on the left side as a 

use of financing (debit). The advantage of double-entry bookkeeping is that it provides a means to validate 

the values entered into a general ledger because the 

sum of entries on each side should equal. 

Double-entry bookkeeping in national economic 

accounting has a somewhat different role than doubleentry bookkeeping in financial accounting. The national accounts are designed to measure all transac17. Many of the formal accounting practices used in financial accounting, such as double-entry bookkeeping, can be traced all the way back to 

merchants and bankers in Florence, Venice, and Genoa during the thirteenth and fifteenth centuries. In contrast, the formal accounting framework for national accounting was introduced by Richard Stone in 1940 (See 

Angus Deaton, “Stone, Richard John Nicholas” in J. Eatwell, M. Milgate 

and P. Newman, eds., The New Palgrave: A Dictionary of Economics, Macmillian: London, 1987, vol. 4: 509–512). 

tions in the economy from the perspective of both 

participants in a transaction—for example, both the 

buyer and the seller. Each transaction is recorded as a 

payment by one sector and a receipt by another—for 

example, corporate income tax is a payment by a corporation and a receipt of the government.18 This system not only provides a means to validate the values 

entered into a set of national economic accounts, but it 

also provides alternative ways to calculate a measure 

when a complete set of information is not available for 

one of the sectors that is involved in a set of exchanges. 

Another fundamental principle used in both financial and national economic accounting is that related 

revenues and expenses must be recorded during the 

same accounting period. To ensure this, the accrual accounting method is usually used. This method records 

the sale of goods or assets when ownership passes, the 

sale of services when they are provided, the generation 

of output when goods and services are produced, and 

the consumption of intermediate goods and services 

when they are used. The accrual accounting method 

differs from the cash accounting method, which 

records revenues when cash is actually received and expenses when cash is actually paid. 

In financial accounting, assets and depreciation are 

commonly (but not invariably) valued at historical 

costs, which are the actual prices that were paid in their 

acquisition. Historical costs are commonly used in financial accounting because they are regarded as relatively objective, since they are supported by verifiable 

historical transactions, and relatively conservative, 

since they do not include holding gains (or losses) that 

have not been realized.19 

In national economic accounting, assets and depreciation are valued at current costs, which are the actual 

or estimated market prices that prevail at the time assets are valued or depreciation occurs. Current costs 

are used in national economic accounting because they 

serve as the best practical approximation to the economic notion of opportunity costs. Opportunity costs 

18. A fully articulated set of national accounts actually leads to a quadruple-entry system. However, transactions are usually recorded only twice in 

the national income and product accounts (NIPAs) because the changes in 

assets or liabilities that are associated with the changes in the revenues and 

expenses are recorded in the Federal Reserve Board flow of funds accounts. 

19. Additional detail on financial accounting practices can be found in 

many of the standard textbooks on the subject, such as John J. Wild, Financial Accounting: Information for Decisions (McGraw-Hill College, 2006) and 

as Jerry J. Weygandt, Donald K. Kieso, and Paul D. Kimmel, Financial 

Accounting: Tools for Decision Making, with Annual Report (John Wiley & 

Sons Inc., 2003). 
Methodology Paper 1 7 

are the foregone benefits that could have been secured 

with the next best alternative use of a resource, which 

serves as one of the most fundamental concepts used 

in economic analysis. 

Common Financial Statements 

The two principal statements that summarize the activities that are recorded in the general ledger of a business are the balance sheet and the income statement. 

Although the form of these statements often differs 

across businesses, their purposes are the same. A balance sheet shows the financial position of a business at 

a given point in time. An income statement shows the 

operating results of a business during an accounting 

period between two balance sheets. 

Two additional statements are usually required to 

supplement the information provided on the balance 

sheet and income statement. The first, a statement of 

cash flows, shows how cash streams through a business 

during an accounting period. Its purpose is to allow 

for an assessment of a business’ ability to settle liabilities, pay dividends, and respond favorably to unanticipated events. The second, a statement of owners’ 

equity, shows how the claims of owners on the assets of 

a business change during an accounting period. Its 

purpose is to show how the change in retained earnings between two consecutive balance sheets is related 

to net earnings. Sometimes this demonstration occurs 

at the end of an income statement, in which case, the 

result is presented as a single statement of income and 

retained earnings. 

The rest of this section introduces the financial 

statements of a representative business firm and then 

derives the set of economic accounts that underlie the 

NIPAs. 

Balance sheet 

The basic identity underlying the balance sheet is that 

the business firm’s assets less its liabilities are equal to 

owners’ equity—that is, 

Assets – liabilities = owners’ equity. 

Since owners’ equity is conceptually the residual 

claim of the corporation’s owners on assets once all liabilities have been met, its value is simply equal to the 

value of the corporation’s assets less the value of its liabilities. Thus, if total assets increase without an offsetting increase in total liabilities, then owners’ equity 

rises; if total assets decrease without an offsetting decrease in total liabilities, then owners’ equity falls. 

 On the balance sheet, there are several categories 

of assets, liabilities, and owners’ equity, which is 

called stockholders’ equity in the case of a corporation 

(table 1). 

Current assets. These are resources that are usually 

converted into cash or used within the period of a 

year. 20 They include cash and cash equivalents, accounts receivable, inventories, and short-term investments. Cash and cash equivalents include coins, 

currency, and undeposited checks; money orders; demand deposits at banks; and certain highly liquid investments. Accounts receivable are short-term credits 

that have been extended to customers to cover goods 

and services that the corporation has already provided 

but for which payment has not yet been received. 

These credits are included on the balance sheet because 

related revenue and expenses need to be reflected during the same accounting period. Short-term investments consist of other types of assets, such as securities 

of other corporations, that are expected to be converted back into cash within the time period that is 

used to define current assets. 

Fixed assets. These consist of assets that are used in 

a productive capacity, have physical substance, are relatively long-lived, and provide future benefits that are 

readily measurable. They mainly consist of plant, 

equipment, and land, and they are usually valued at 

historical costs less accumulated depreciation. 

Long-term investments. These consist of financial 

assets, such as securities of other corporations, that are 

expected to be converted into cash or used after the period of time that is used to measure current assets. 

Current liabilities. These consist of obligations that 

are either due upon demand or expected to be due 

within the same period of time that is used to define current assets. Current liabilities include accounts payable and short-term liabilities, such as the 

principal that must be paid during the current period 

on long-term debts. Accounts payable are short-term 

20. The period of time that is used to define current assets is either the 

period of a year or an operating cycle, whichever is longer. An operating 

cycle is the average period of time between the initial purchase of intermediate goods and services and the collection of accounts receivable for the 

related sales of products. 

Table 1. Balance Sheet, December 31, 20__ 

(In thousands) 

Assets 

Current assets: 

Cash and cash equivalents................................................................................ 

Accounts receivable........................................................................................... 

Inventories ......................................................................................................... 

Short-term assets .............................................................................................. 

280 

300 

10 

10 

Total current assets..................................................................................... 

Fixed assets................................................................................................... 

Long-term investments .................................................................................. 

600 

1,390 

190 

Total assets .............................................................................................. 2,180 

Liabilities and stockholders’ equity 

Current liabilities: 

Accounts payable............................................................................................... 

Short-term liabilities........................................................................................... 

200 

70 

Total current liabilities................................................................................. 

Long-term liabilities........................................................................................ 

Stockholders’ equity: 

Capital stock ...................................................................................................... 

Retained earnings ............................................................................................. 

270 

310 

260 

1,340 

Total stockholders’ equity............................................................................... 

Total liabilities and stockholders’ equity............................................... 

1,600 

2,180 
8 Methodology Paper 1 

debts that have been assumed by the business for 

goods and services already received but for which payment has not yet been made. 

Long-term liabilities. These consist of long-term 

obligations, such as note and bond payments, that are 

not expected to be due until after the period of time 

that is used to define current liabilities. 

Stockholders’ equity. The ownership stake of stockholders includes the amount shareholders paid for 

their stocks (capital stock) and the retained earnings of 

the corporation. Retained earnings are net earnings 

that have been saved by the corporation for future use 

or investment. 

Income and retained earnings 

The basic identity underlying the statement of income 

and retained earnings is that the business firm’s net 

earnings are equal to its revenue less its expenses—that 

is, 

Net earnings = revenue – expenses. 

However, the statement does not derive net earnings 

by subtracting all expenses from all revenue in a single 

step. Rather, it derives net income through a series of 

steps to provide a useful set of intermediate income 

measures to investors and creditors. 

Gross profits. This measure is derived by subtracting the costs of goods and services sold from sales, 

which are measured net of discounts and returns (table 

2). Although various accounting conventions may be 

used to record the costs of goods and services sold, the 

purpose of this measure is to account for the costs that 

can be directly linked to the production of goods and 

services. 21 These expenses include purchases of intermediate goods and services, labor costs of production 

21. An accurate determination of the costs that can be directly linked to 

the production of goods and services is one of the more difficult tasks in 

financial accounting. As a result, many corporations simply rely on fixed 

ratios to allocate a certain percentage of expenses to this category. 

Table 2. Statement of Income and Retained Earnings, 
 
 


For Year Ending December 31, 20__
 
 
 

(In thousands) 

Sales, net of discounts and returns........................................................................ 

Costs of goods and services sold .......................................................................... 

Gross profits................................................................................................... 

Operating expenses ............................................................................................... 

Operating income........................................................................................... 

Other income.......................................................................................................... 

2,630 

(1,770) 

860 

(460) 

400 

10 

Net earnings before interest and taxes .......................................................... 

Interest receipts...................................................................................................... 

Interest payments................................................................................................... 

410 

10 

(20) 

Net earnings before taxes .............................................................................. 

Income taxes .......................................................................................................... 

400 

(150) 

Net earnings after taxes ................................................................................. 

Dividends paid........................................................................................................ 

Additions to retained earnings ....................................................................... 

250 

(110) 

140 

workers, depreciation of plants and equipment used in 

production, and changes in inventories (beginning-ofperiod less end-of-period). 

Operating income. This measure is derived by subtracting operating expenses and depreciation from 

gross profits. Operating expenses consist of the costs 

that are associated with the general operations of the 

corporation but cannot be directly linked to the production of goods and services. These expenses include 

labor costs of administrative staff, property taxes, depreciation of office buildings and equipment, inspection fees, charitable contributions, and royalty 

payments. 

Other income. This consists of income that is received from activities that are not associated with normal business activities, such as gains (net of losses) on 

sales of securities and fixed assets. 

Net earnings before interest and taxes. This measure is derived by adding other income to operating income. 

Net earnings after taxes. This measure is derived by 

adding interest receipts, subtracting interest payments, 

and then subtracting income taxes from net earnings 

before interest and taxes. 

Additions to retained earnings. This measure is derived by subtracting dividends paid to shareholders 

from net earnings after taxes. 

Cash flows 

The statement of cash flows begins by separately deriving the net cash flows associated with the operating, 

investing, and financial activities of the corporation 

(table 3). Afterwards, these three measures are 

summed to arrive at the net increase in cash. 

Table 3. Statement of Cash Flows,
 
 
 

For Year Ending December 31, 20__
 
 
 

(In thousands) 

Cash flows from operating activities: 

Net earnings after taxes..................................................................................... 

Adjustments to reconcile net earnings after taxes to cash ................................ 

provided by operating activities: 

250 

Depreciation of plant and equipment ............................................................. 

Changes in assets and liabilities: 

170 

Increase in current assets.......................................................................... (30) 

Decrease in current liabilities..................................................................... 10 

Net cash provided by operating activities .............................................. 

Cash flows from investing activities: 

400 

Sales of fixed assets .......................................................................................... 10 

Sales of securities.............................................................................................. 0 

Purchases of fixed assets .................................................................................. (100) 

Purchases of securities...................................................................................... (30) 

Net cash used in investment activities................................................... (120) 

Cash flows from financing activities: 

Issues of bonds.................................................................................................. 40 

Issues of capital stock........................................................................................ 50 

Retirements of bonds......................................................................................... (120) 

Dividend payments ............................................................................................ (110) 

Net cash used in financing activities...................................................... (140) 

Net increase in cash .............................................................................................. 140 

Cash and cash equivalents at beginning of year ................................................... 140 

Cash and cash equivalents at end of year............................................................. 280 

NOTE. Negative numbers in a running total are shown in parentheses. NOTE. Negative numbers in a running total are shown in parentheses. 
Methodology Paper 1 9 

Net cash flows provided by operating activities. 

This measure is indirectly derived by applying a series 

of adjustments to the accrual-based measure of net 

earnings after taxes to arrive at the cash-based measure 

of net cash flows.22 These adjustments include adding 

depreciation, subtracting increases in current assets, 

and adding decreases in current liabilities. 

Net cash flows used in investment activities. This 

measure is directly derived by subtracting cash outflows from cash inflows. Cash inflows in this section of 

the statement include sales of fixed assets, along with 

sales of securities that have been issued by other corporations. Cash outflows in this section of the statement 

include purchases of fixed assets, along with purchases 

of securities that have been issued by other corporations. 

Net cash flows used in financing activities. This 

measure is directly derived by subtracting cash outflows from cash inflows. Cash inflows in this section of 

the statement include the issuance of bonds and securities. Cash outflows in this section of the statement include the retirement of bonds and dividends paid to 

stockholders. 

Financial Statements, Economic 

Accounts for the Business Sector, 

and the NIPAs 

The three financial statements discussed above are related to four economic accounts that provide the 

22. Business firms may also calculate net cash flows from operating activities using a more direct method that lists major classes of gross receipts and 

gross expenditures. However, the indirect method presented in this paper is 

more commonly used. 

building blocks for the key measures of the business 

sector in the NIPAs. 

The first economic account, a production account, 

shows the contribution that is made by the business 

firm to GDP. The second account, an enterprise income account, shows how net income from production and income from the ownership of financial 

assets is used to fund the payment of interest to the 

business firm’s creditors. The third account, an income and outlay account, shows how the business 

income that remains after interest and certain types of 

transfer payments have been made is either retained 

by the business firm or used to pay income taxes to 

the government or dividends to the business firm’s 

owners. The fourth account, a capital account, shows 

how the retained income of the business is used to purchase fixed assets. 

All four of these economic accounts can be conceptually derived from the information in the business 

firm’s financial statements. In particular, the first three 

of these accounts are directly related to the statement 

of income and retained earnings. The last of these accounts is directly related to the portion of the statement of cash flows that deals with fixed assets and 

depreciation. 

The derivation of each economic account from the 

financial statements of the business firm can be easily 

seen by first creating a ledger that organizes transactions into measures that appear in each of the respective accounts (table 4). Afterwards, national 

accounting identities are used to define the accounts, 

and few of the items in the ledger are adjusted or 

moved to the other side of the account to create the final measures. 

Table 4. Detailed Ledger for Sources and Uses of Revenue, For year ending December 31, 20__ 

(In thousands) 

Uses Sources 

Charges against revenue in the production account: Revenue in the production account: 

Compensation of employees ............................................................................. 1,610 Sales, net of discounts 1 .................................................................................... 2,740 

Wages and salaries ....................................................................................... 1,380 

Supplements to wages and salaries.............................................................. 230 

Purchases of intermediate goods and services................................................. 400 

Changes in inventories ...................................................................................... 10 

Taxes on production and imports 1 .................................................................... 160 

Depreciation ...................................................................................................... 170 

Charges against revenue in the enterprise income account: Revenue in the enterprise income account: 

Interest and miscellaneous payments ............................................................... 20 Interest receipts ................................................................................................. 10 

Current transfer payments (net)......................................................................... 10 Dividend receipts ............................................................................................... 20 

Charges against revenue in the income and outlay account: 

Taxes on corporate income................................................................................ 150 

Dividend payments ............................................................................................ 110 

Undistributed corporate profits 2 ........................................................................ 130 

Charges against revenue .................................................................................... 2,770 Revenue ................................................................................................................ 2,770 

1. This item differs from “sales, net of discounts” in table 2 because it includes sales and excise taxes. 

2. This item differs from retained earnings in table 2 because net capital transfers and gains (net of losses) on the sale of fixed assets and securities are excluded from both sides of the table. 
10 Methodology Paper 1 

Production account for a business firm 

The production account for a business firm shows the 

value of goods and services that can be attributed to 

the business firm both directly in terms of the goods 

and services that it produces and indirectly in terms of 

the costs that it incurs during production (first panel 

of table 5). 

The basic identity underlying the production account is that gross value added is equal to the 

charges against gross value added and net operating 

surplus—that is,

 Gross value added = charges against gross 

value added + net operating surplus. 

Net operating surplus, which is a profits-like measure, is conceptually the balance on the account that 

remains once the charges against gross value added 

have been deducted from gross value added. Thus, if 

gross value added increases without an offsetting increase in charges against gross value added, then net 

operating surplus will rise; if gross value added decreases without an offsetting decrease in charges 

against gross value added, then net operating surplus 

will fall. 

Gross output, which appears on the right side of the 

account, is derived by moving the changes in inventories to the right side of the ledger, with a change in sign 

so that it represents end-of-period inventories less beginning-of-period inventories, and adding its value to 

sales. 23 Gross value added is derived by moving intermediate goods and services to the right side of the ledger and subtracting its value from gross output. 

Charges against gross value added, which appear on 

the left side of the account, consist of the compensation of employees, taxes on production and imports, 

23. More specifically, only changes in inventories of work in progress and 

finished goods are added to sales in the derivation of gross output. Changes 

in materials and supplies inventories are deducted from purchases of intermediate goods and services to derive intermediate consumption. This practice is consistent with showing consumption of materials and supplies when 

used in production rather than when purchased. Although only work-inprogress and finished goods inventories are added to sales in calculating 

gross output, all three types of inventories are included in the measure of 

“changes in private inventories” that is used to calculate GDP in the expenditure approach of calculating GDP. 

Table 5. Economic Accounts for a Corporation, For year ending December 31, 20__ 

(In thousands) 

Production Account 

Uses Sources 

Compensation of employees ................................................................................. 

Wages and salaries ........................................................................................... 

Supplements to wages and salaries.................................................................. 

Taxes on production and imports........................................................................... 

Depreciation .......................................................................................................... 

Net operating surplus ............................................................................................ 

1,610 

1,380 

230 

160 

170 

390 

Gross output........................................................................................................... 

Sales .................................................................................................................. 

Changes in inventories....................................................................................... 

Less: Intermediate goods and services ................................................................. 

2,730 

2,740 

(10) 

400 

Charges against gross value added and net operating surplus ..................... 2,330 Gross value added ............................................................................................... 2,330 

Enterprise Income Account 

Uses Sources 

Interest and miscellaneous payments ................................................................... 

Current transfer payments ..................................................................................... 

Corporate profits.................................................................................................... 

20 

10 

390 

Net operating surplus............................................................................................. 

Income receipts on assets ..................................................................................... 

Interest ............................................................................................................... 

Dividend receipts ............................................................................................... 

390 

30 

10 

20 

Uses of income and corporate profits............................................................... 420 Sources of income ............................................................................................... 420 

Income and Outlay Account 

Uses Sources 

Taxes on corporate income ................................................................................... 

Equals: Profits after tax ......................................................................................... 

Dividend payments ............................................................................................ 

Undistributed corporate profits .......................................................................... 

150 

240 

110 

130 

Corporate profits .................................................................................................... 390 

Distributions of income and undistributed corporate profits ......................... 390 Sources of income ............................................................................................... 390 

Capital Account 

Changes in assets Sources 

Gross investment................................................................................................... 

Net acquisition less disposal of non-produced nonfinancial assets....................... 

Net lending or net borrowing ................................................................................. 

90 

10 

210 

Gross saving .......................................................................................................... 

Undistributed corporate profits........................................................................... 

Depreciation....................................................................................................... 

Net capital transfers ............................................................................................... 

300 

130 

170 

10 

Gross investment, net acquisition less disposal of nonproduced 

nonfinancial assets, and net lending ............................................................ 310 Gross saving and net capital transfers .............................................................. 310 
Methodology Paper 1 11 

and depreciation. 

A few additional points about the measures in this 

account should be made. 

Changes in inventories. This measure differs from 

that shown in the financial statements of corporations 

because it is based on the current costs that are used in 

national accounting rather than the historic costs that 

are often used in financial accounting. 

Changes in inventories are moved to the right side 

of the account because what is sold by the corporation 

is often not equal to what is produced during the same 

accounting period. In particular, if the firm produces 

more goods than it sells, then the remaining goods are 

placed into inventories; if the firm produces fewer 

goods than it sells, then the shortfall is met by withdrawing goods from inventories. The addition of the 

changes in inventories to sales removes sales of goods 

that were not produced during the current period and 

adds produced goods that were not sold during the 

current period to arrive at a true measure of gross output during the period. 

Compensation of employees. This measure, which 

appears on the left side of the account, consists of the 

sum of a measure of wages and salaries and a measure 

for supplements to wages and salaries. Wages and salaries are broadly defined to include commissions, tips, 

and bonuses; voluntary employee contributions to deferred compensation plans, such as 401(k) plans; employee gains from exercising stock options; and 

receipts-in-kind that represent income. Supplements 

to wages and salaries consist of employer contributions 

to employee pension and insurance plans and of employer contributions for government social insurance. 

Taxes on production and imports. These taxes consist of tax liabilities that are incurred in the production 

of goods and services. They include Federal excise taxes 

and customs duties and state and local sales taxes, 

property taxes, motor vehicle licenses, severance taxes, 

other taxes, and special assessments. All of these items 

except for sales and excise taxes are included in the 

measure of operating expenses in the business firm’s financial statements. Sales and excise taxes are included 

in the measure of taxes on production and imports because their value is added to sales on the other side of 

the ledger so that GDP is valued at the costs to final 

purchasers. 

Consumption of fixed capital (CFC). This measure 

replaces the measures of depreciation in the individual 

business accounts. Although the two measures are 

closely related, they differ in two important ways. First, 

CFC is based on a consistent set of service lives and 

empirically based depreciation schedules rather than 

on the various conventions that are used in financial 

accounting. Second, CFC is based on the current costs 

that are used in national accounting rather than the 

historical costs that are often used in financial accounting.24 

Net operating surplus. This measure is defined as 

the residual claim against gross value added after the 

charges directly related to production—that is, compensation of employees, taxes on production and imports (less subsidies), and consumption of fixed 

capital—have been deducted. It measures the surplus 

or deficit accruing from production before taking account of any interest and dividends receivable on financial assets owned by the corporation; payments to 

those with financial claims on the firm, such as interest 

or dividends payable; and other nonoperating payments, such as current business transfer payments and 

taxes on corporate income. The net operating surplus 

reflects the net return to assets that the firm uses in 

production. 

Enterprise income account 

The enterprise income account shows how the corporation’s operating surplus and its nonoperating income (interest and dividends) are used for interest 

payments to the providers of financial capital and for 

transfer payments, leaving a balance for the owners as 

corporate profits (second panel of table 5). 

The basic identity underlying the enterprise income 

account is that the sources of income are equal to uses 

of income and corporate profits—that is, 

Sources of income =
 
 
 

uses of income + corporate profits.
 
 
 

Corporate profits are conceptually the residual 

charge against income that remains after uses of income have been deducted. 

On the right side of the account, the sources of income consist of both the net income from production 

and income receipts on assets. Net income from production is measured by net operating surplus, which 

has been carried over from the production account. 

Income receipts on assets consist of interest receipts 

from other economic institutions and of dividend receipts. 

On the left side of the account, uses of net income 

consist of interest and miscellaneous payments and of 

current transfer payments. A few points should be 

made about the transactions and adjustments that are 

included in these measures. 

24. For additional information on the calculation of CFC, see the chapter 

entitled “Concepts and Methods” in Bureau of Economic Analysis, Fixed 

Assets and Consumer Durable Goods in the United States, 1925–97 (Washington, DC: U.S. Government Printing Office, September 2003). 
12 

Interest receipts. This measure differs from that 

used in financial accounting because it includes both 

the monetary receipts that are recorded on financial 

statements and the imputed receipts that are used in 

national economic accounting. These imputed interest 

receipts are included to account for the value of implicit financial services that are provided by commercial banks and by property and casualty insurance 

companies.25 

Interest and miscellaneous payments. This measure differs from the measure of interest payments 

used in financial accounting in two ways. First it includes any rents or royalties for natural resources paid 

to government that may be included in the measure of 

operating surplus in the business firm’s financial statements. Rents and royalties related to other items, such 

as building equipment, or patented research, are excluded from this measure because they are treated as 

purchases of intermediate goods and services. Second, 

much like the measure of interest receipts in this account, interest and miscellaneous payments includes 

imputed interest payments to account for the value of 

implicit financial services that are provided by commercial banks and by property and casualty insurance 

companies. 

Current transfer payments (net). These payments 

consist of cash or in-kind payments where nothing is 

received in return. However, current transfer payments 

exclude payments that are related to acquisition or 

disposal of fixed assets, such as capital gains or estate 

or gift taxes. These types of transfers are classified as 

capital transfers and included in the capital account. 

For the business firm, current transfer payments include fines and certain fees paid to government, the 

portion of insurance premiums that is not a payment 

for service (net of benefits received), charitable contributions to nonprofit organizations, and various other 

unrequited payments. With the exception of the adjusted value for insurance premiums, these items are 

included as in the measure of operating expenses in the 

firm’s financial statements. 

Corporate profits. The measure of corporate profits 

includes adjustments so that it is based on the inventory valuation and depreciation concepts that are used 

in national economic accounting. 26 

25. For a discussion of the treatment of the transactions associated with 

commercial banks and with property and casualty insurance companies, 

see Brent R. Moulton and Eugene P. Seskin, “Preview of the 2003 Comprehensive Revision of the National Income and Product Accounts,” SURVEY 83 

(June 2003): 17–34. 

26. Since the more detailed tables of the NIPAs also provide measures of 

corporate profits that are based on data reported to the Internal Revenue 

Service, the adjustments that are applied in the derivation of the measures 

in this account are explicitly mentioned in the title for this measure. 

Methodology Paper 1 

Income and outlay account 

The income and outlay account shows how corporate 

profits, which have been carried forward from the enterprise income account, are used to either pay corporate income taxes or dividends to shareholders or are 

retained by the corporation (third panel of table 5). 

The basic identity underlying the income and outlay 

account is that the sources of income are equal to the 

distributions of income and undistributed corporate 

profits—that is, 

Sources of income = distributions
 

of income + undistributed corporate profits.
 

Undistributed corporate profits are the residual 

charge against income that remains once distributions 

of income have been made to other economic agents. 

Capital account 

The capital account shows how saving is used to acquire nonfinancial assets, such as fixed assets and inventories (fourth panel of table 5). 

The basic identity underlying the capital account is 

that the value of gross savings and net capital transfers 

is equal to the value of gross investment and the value 

of net lending or borrowing—that is, 

Gross saving and net capital transfers =
 

gross investment + acquisition less
 

disposal of nonproduced nonfinancial assets
 

+ net lending or borrowing.
 

Net lending or borrowing is the residual claim on 

gross saving once gross investment and acquisition less 

disposal of nonproduced nonfiancial assets have been 

deducted. Its value can viewed as the amount available 

to lend to other units if saving exceeds investment or 

the amount the corporation is required to borrow to 

finance investment that cannot be funded from CFC 

and undistributed profits. 

Gross saving, which appears on the right side of the 

account, consists of both undistributed corporate 

profits, which have been carried over from the income 

and outlay account, and CFC. Gross investment, which 

appears on the left side of the account, consists of both 

purchases of fixed assets and changes in inventories. 

Although the structure of the capital account is relatively straightforward, a few additional points should 

be made about the measures that are shown in this account and their relation to the Federal Reserve Board 

flow of funds accounts (FFAs). 

Net capital transfers. Net capital transfers are cash 

or in-kind transactions that are related to the acquisition or disposal of fixed assets where one of the parties 
Methodology Paper 1 13 

involved in the exchange gets nothing in return. In this 

account, they consist of investment grants received 

from the Federal Government. 

Gross investment. This measure differs from the 

measure of purchases of fixed assets in two ways. First, 

gross investment does not include purchases of land, 

which are treated as an acquisition of a nonproduced 

nonfinancial asset (discussed below). Second, since the 

national accounts treat software expenditures as investment, gross investment includes expenditures related to the purchase or “in-house” development of 

software used in production.27 

Acquisition less disposal of nonproduced nonfinancial assets. Nonproduced nonfinancial assets consist of nonfinancial assets that are necessary for 

production but have not themselves been produced. 

These assets primarily consist of natural resources, 

such as land, electromagnetic spectrum, and offshore 

drilling rights. 

Relation to the FFAs. Although the measure of net 

lending or borrowing that is presented in this account 

is calculated as the residual claim on gross saving once 

gross investment and acquisition less disposal of nonproduced nonfinancial assets have been deducted, its 

value can also be calculated by subtracting the acquisi27. For a discussion of the treatment of software investment in the NIPAs, 

see Brent R. Moulton, Robert P. Parker, and Eugene P. Seskin, “A Preview of 

the 1999 Comprehensive Revision of the National Income and Product 

Accounts: Definitional and Classification Changes,” SU R V E Y 79 (August 

1999): 7–20. 

tion of financial liabilities from the acquisition of financial assets. This alternative calculation works 

because saving that is not spent on purchases of fixed 

assets results in the acquisition of financial assets, and 

borrowing that is used to finance the purchase of fixed 

assets results in the acquisition of financial liabilities. 

The measure of net lending or borrowing links the 

NIPAs to the FFAs. In particular, the economic accounts that underlie the FFAs begin by subtracting the 

acquisition of financial liabilities from the acquisition 

of financial assets to arrive at a measure of net lending 

or borrowing, which in principle should equal the 

measure that is calculated in the NIPAs. In practice, 

these measures differ because they are calculated from 

different source data and reflect differences in methodologies. The remaining economic accounts then record 

changes in the value of financial assets and liabilities to 

finally arrive at a measure for the change in net 

wealth.28 As a result, the NIPAs and the FFAs jointly 

show how the changes in net wealth between balance 

sheets are related to income from production, much 

like what is done in financial statements.29 

28. Because of data limitations, the set of balance sheets provided in the 

FFAs do not cover all sectors in the economy. 

29. BEA and the Federal Reserve Board have been working together to 

further integrate the NIPAs and the FFAs. One outcome of these efforts is 

the development of a set of integrated accounts that use consistent terminology for a consistently defined set of sectors. For more on this topic see, 

Charlotte Anne Bond, Teran Martin, Susan Hume McIntosh, and Charles 

Ian Mead, “Integrated Macroeconomic Accounts for the United States,” 

SU R V E Y 87 (February 2007): 14–31. 
14 

III. Economic Accounts for Sectors
 
 
 

T HIS section presents a detailed discussion of the 

economic accounts for each of the three sectors 

that contribute to domestic output in the economy—business, households and institutions, and general government. The economic accounts for each 

sector consist of an aggregation of the individual economic accounts for all related institutions. However, 

two specific types of manipulations are involved in the 

aggregation of the accounts for each sector. First, the 

details provided on the individual accounts are expanded to separately identify the transactions that are 

made with the other sectors of the economy and the 

rest of the world. Second, a few types of accounting entries are offset against one another to avoid double 

counting in important measures presented in the accounts. 

Business Sector 

The NIPA business sector consists of all entities that 

produce goods and services for sale at a price intended 

at least to approximate the costs of production, corporate and noncorporate private enterprises organized 

for profit, and certain other types of entities. These 

other types include mutual financial institutions, private noninsured pension funds, cooperatives, nonprofit organizations (that is, entities classified as such 

by the Internal Revenue Service in determining income 

tax liability) that primarily serve business, Federal Reserve Banks, federally sponsored credit agencies, and 

government enterprises. 

Since the primary role of business in the economy is 

to employ resources in the production of final goods 

and services, most domestic output is produced within 

this sector. 

The structure of the accounts for the business sector 

is similar to the economic accounts for an individual 

business firm. However, one notable exception is that 

the enterprise income and the income and outlay accounts for individual businesses are combined into a 

single account for the business sector by including 

measures of taxes on corporate income, of dividend 

payments, and of undistributed corporate profits as 

components of the measure of corporate profits on the 

left side of the account (second panel of table 6). In addition, many of the measures in the accounts for the 

business sector require further explanation. 

Subsidies. This measure, which appears on the left 

side of the production account, consists of monetary 

grants from government to private business or to government enterprises at a different level of government 

(as defined below). Since subsidies are equivalent to 

negative taxes on production and imports, they are 

netted against these taxes on the left side of the production account in the calculation of net operating 

surplus. 

Net operating surplus of private enterprises. This 

measure includes the operating surplus of both incorporated and unincorporated businesses. For corporations, net operating surplus is generally thought to 

Table 6. Economic Accounts for Business 

Production Account 

Uses Sources 

Compensation of employees 

Wages and salaries 

Supplements to wages and salaries 

Taxes on production and imports 

Less: Subsidies 

Consumption of fixed capital 

Net operating surplus 

Private enterprises 

Current surplus of government enterprises 

Gross output 

Sales 

Changes in inventories 

Less: Intermediate goods and services 

Charges against gross value added and net 

operating surplus 

Gross value added 

Business Enterprise Income Account 

Uses Sources 

Income payments on assets 

Interest and miscellaneous payments 

Dividend payments to the rest of the world 

Reinvested earnings on foreign direct investment in 

the United States 

Current transfer payments 

To persons 

To government 

To the rest of the world 

Current surplus of government enterprises 

Proprietors’ income with inventory valuation and capital 

consumption adjustments 

Rental income of other private business with capital 

consumption adjustment 

Corporate profits with inventory valuation and capital 

consumption adjustments 

Less: Taxes on corporate income 

To government 

To the rest of the world 

Equals: Profits after tax 

Net dividends 

Undistributed corporate profits with inventory 

valuation and capital consumption adjustments 

Net operating surplus 

Income receipts on assets 

Interest 

Dividends received from the rest of the world 

Reinvested earnings on U.S. direct investment 

abroad 

Uses of enterprise income Sources of income 

Capital Account 

Changes in assets Sources 

Gross investment 

Acquisition less disposal of non-produced nonfinancial 

assets 

Net lending or net borrowing 

Gross saving 

Undistributed corporate profits with inventory 

valuation and capital consumption adjustments 

Consumption of fixed capital 

Net capital transfers 

Gross investment, net acquisition less disposal of 

nonproduced nonfinancial assets, and net 

lending 

Gross saving and net capital transfers 
Methodology Paper 1 15 

reflect the net return to assets used in production. 

However, for some unincorporated businesses, net operating surplus may also reflect the value of uncompensated labor contributed by owners. Because this 

measure reflects a mixture of returns to capital and labor, the SNA refers to this balance as “mixed income” 

in the case of unincorporated household enterprises. 

However, the NIPAs use the term operating surplus for 

all types of business. 

Current surplus of government enterprises. The 

current surplus of government enterprises consists of 

the net earnings of government agencies that cover a 

substantial portion of their operating costs by selling 

goods and services to the public and that maintain 

their own separate accounts. Typical examples of government enterprises include the U.S. Postal Service, 

state and local utility companies, and state and local 

transit authorities. Although many state universities 

and public parks maintain separate financial records, 

they are not treated as government enterprises in the 

accounts because their admissions charges and fees 

usually cover only a small portion of their operating 

expenses. Rather, such institutions are treated as part 

of general government. 

The treatment of the current surplus of government 

enterprises in the accounts is similar to that of net operating surplus of private corporations. In particular, 

the current surplus is included on the left side of the 

production account. The only difference in treatment 

is that the entire value of the current surplus is distributed to the general government. In other words, general government, as the ultimate owner of government 

enterprises, is assumed to have access to the resources 

derived from the current surplus of, and to be responsible for investment in, those enterprises. 

Reinvested earnings on direct investment. Two additional measures that relate to net income receipts 

from the rest of the world appear in the income and 

outlay account for business. The first, reinvested 

earnings on U.S. direct investment abroad, consists of 

U.S. investors’ claims on current-period undistributed 

earnings of foreign businesses in which they own or 

control 10 percent or more of the business. This measure is included as part of income receipts on assets on 

the right side of the account. The second, reinvested 

earnings on foreign direct investment in the United 

States, consists of the foreign investors’ claims on the 

current-period undistributed earnings of domestic 

U.S. businesses in which they own or control 10 percent or more of the business. This measure is included 

as part of the income payments on assets on the left 

side of the account. These flows are included in the account to attribute the earnings of foreign direct investment enterprises to the country of the controlling 

parent enterprise, regardless of whether the earnings 

are actually distributed to the parent or are retained 

and reinvested by the subsidiary. 

Proprietors’ income. This measure consists of the 

net earnings of sole proprietorships, partnerships, and 

tax-exempt cooperatives that are based on the inventory valuation and depreciation concepts that are used 

in national economic accounting.30 Sole proprietorships are businesses that are owned and managed by 

single individuals who are personally liable for all business debts. For tax purposes, the owners and their 

businesses are treated as single tax entities. Partnerships are businesses that are owned and managed by 

two or more persons where at least one person is personally liable for all business debts.31 For tax purposes, 

the net earnings of partnerships are “passed through” 

to owners who report and pay taxes on this income in 

their personal income tax returns. 

The treatment of proprietors’ income in the accounts is similar to the treatment of corporate profits. 

In particular, proprietors’ income is included on the 

left side of the business enterprise income account. Although sole proprietors and partnerships may retain 

net earnings for future use or investment, a simple accounting convention is used to record the distribution 

of their income, because of data limitations. In particular, proprietors’ income is treated as being distributed 

entirely to owners in the household and institutions 

sector, which is consistent with the tax treatment of 

such income. This treatment is similar to the way the 

current surplus of government enterprises is attributed 

to their owners in the government sector. 

Rental income of other private business. This measure consists of the income earned from the rental of 

properties by landlords who are not sole proprietors or 

associated with a partnership or corporation and of 

the royalties received by persons from patents, copyrights, and rights to natural resources. It excludes the 

rental income of owner-occupants, which is discussed 

in the section on households and institutions. As with 

proprietors’ income, the rental income of other private 

business is calculated by using the depreciation concept that is used in national accounting. For tax purposes, the rental income of persons is reported on 

Schedule E of an individual income tax return. For the 

economic accounts of the business sector, this income 

is treated in the same manner as proprietors’ income. 

Net dividends. Dividend payments and receipts 

30. Since the more detailed tables of the NIPAs also provide measures of 

proprietors’ income that are based on data reported to the Internal Revenue 

Service, the adjustments that are applied in the derivation of the measures 

in this account are explicitly mentioned in the title for this measure. 

31. The term “persons” in this context is defined by the Uniform Partnership Act and covers a broad set of legal entities, including individuals, business trusts, estates, and trusts. 
16 

between domestic businesses are offset against one 

another to avoid the double counting of corporate 

profits in the NIPAs. As a result, the measure of net 

dividends that appears at the bottom of the business 

enterprise income account consists of dividend payments made by corporations located in the United 

States and abroad to stockholders who are U.S. residents less the dividend payments received by U.S. corporations. 

Households and Institutions Sector 

The NIPA households and institutions sector consists 

of households and nonprofit institutions serving 

households (NPISHs). The activities of these two different types of entities are combined into a single sector in the NIPAs because NPISHs provide services to 

households and because data on nonprofits institutions have traditionally been weak.32 

As the primary role of households and institutions 

serving households in the economy is to earn income 

for consumption or saving by providing resources for 

production, most of the income that is generated in 

production is distributed to this sector. Most sales of 

final goods and services are also made to this sector. 

Although the structure of the accounts for households and institutions is similar to that for businesses, 

there are enough differences to warrant a separate discussion for each of the new accounts. 

Production account 

The production account for households and institutions records the value of three different types of 

output: The rental services provided to homeowners 

by owner-occupied housing, compensation paid to domestic workers, and nonprofit services that are provided to households. The rest of this section discusses 

the accounting conventions that are used to record the 

value of each type of output and the effects that these 

conventions have on the measure of net operating surplus. 

Owner-occupied housing services. As the rental of 

tenant-occupied housing is counted as a sale of a service and is part of the business sector’s output, the services provided by owner-occupied housing must also 

be counted in GDP. Otherwise, the value of GDP 

would change every time a housing unit switched be32. By combining the activities of households and of nonprofit institutions serving households into a single consolidated account, transactions 

between these separate types of entities did not need to be presented. However, due to increased data availability in more recent years, information on 

the incomes and outlays for each of these types of entities is available in 

NIPA table 2.9. For a discussion of NIPA table 2.9, see Charles Ian Mead, 

Clinton P. McCully, and Marshall B. Reinsdorf, “Income and Outlays of 

Households and of Nonprofit Institutions Serving Households,” SURVEY 83 

(April 2003): 13–17 

Methodology Paper 1 

tween tenant occupied and owner occupied. To avoid 

this problem an imputation is included in the production account to treat owner-occupied housing in the 

same manner as rental property in the NIPAs. Although this is done by simply treating homeowners as 

if they were landlords that rented their own homes to 

themselves, the actual conventions that are used to 

record the value of owner-occupied housing are intricate. 

On the right side of the account, a measure for space 

rent is included in the measure of gross output (first 

panel of table 7). As there are well-developed rental 

markets for housing, the imputation for space rent is 

based on the rents that are charged by landlords for 

equivalent types of property. Spending by homeowners on closing costs, repairs, and property insurance is 

included in the measure of intermediate goods and 

services, which is subtracted from gross output to arrive at gross value added, as is done with the similar 

business expenses for owners of rental property. 

On the left side of the account, property taxes paid 

by homeowners are included in the measure of taxes 

on production and imports. The measures for subsidies and consumption of fixed capital also include the 

relevant values for owner-occupied housing. The account is kept in balance by the measure of net operating surplus, which is used for mortgage interest 

payments and to generate rental income for owner-occupied housing. 

Domestic services. The value of compensation that 

is paid for domestic services is included in the measures of gross output and gross value added on the 

right side of the account. This value is also included in 

the measure of compensation on the left side of the account. 

Nonprofit services. Since nonprofit institutions 

serving households (NPISHs) often rely on contributions, government grants, and income receipts on assets to cover many of their expenses, sales are not a 

good measure of the value of their gross output. As a 

result, the NIPAs value their gross output by the expenses that they incur in production. 

On the right side of the account, the value of gross 

output is calculated as the sum of the compensation of 

employees, intermediate goods and services, taxes on 

production and imports (less subsidies), CFC, and 

mortgage interest. The measure of intermediate goods 

and services, which is subtracted from gross output to 

arrive at gross value added, also includes the relevant 

values for NPISHs. 

On the left side of the account, the measures for 

compensation of employees, taxes on production and 

imports (less subsidies), CFC, and net interest include 

the relevant values for NPISHs. These last three types 
Methodology Paper 1 17 

of expenses make up the rental value of fixed assets 

that are owned and used by NPISHs. 

Enterprise income account 

The enterprise income account for households and institutions shares the same structure as the corresponding account for the business firm, but the account for 

households and institutions is limited to transactions 

associated with owner-occupied housing and nonresidential assets owned by NPISHs (second panel of table 

7). 

Income and outlay account 

The income and outlay account for households and institutions resembles the corresponding account for 

business. However, the sources and uses of income that 

are recorded in the two related accounts differ substantially. Whereas the primary sources of income for business are sales revenues, the primary sources of income 

for households and institutions are income receipts 

that are associated with the provision of resources for 

production (third panel of table 7). The primary use of 

income for households and institutions is personal 

consumption expenditures, which has no counterpart 

for business. 

Another difference between the two related accounts involves the particular accounting entries that 

are offset against one another to avoid double counting. For business, dividend payments and receipts between domestic businesses are offset against one 

another. For households and institutions, payments of 

charitable contributions by households are offset 

against the receipts of such contributions by NPISHs. 

As a result, such contributions are excluded from the 

related account, avoiding a source of double counting 

in personal income. 

In addition to the offsetting for charitable 

contributions, revenues from sales by NPISHs are deducted from the total expenditures of households and 

institutions in the measure of personal consumption 

expenditures that appears on the left side of the account. This practice avoids double counting in GDP 

because the value of such sales are already reflected in 

the measures of consumption expenditures or are considered intermediate goods and services in the NIPAs. 

Two additional points should be mentioned before 

turning to a more detailed discussion of the measures 

in the account. First, because of data limitations, most 

of the transactions in this account are recorded on a 

cash basis rather than an accrual basis.33 Second, payments that are made in households’ behalf by business 

33. Most business transactions, such as interest payments and receipts, are 

likely to be recorded on an accrual basis. 

and government are included as both a source and a 

use of income in this account, even though such receipts and payments are usually excluded from household budgets. For instance, employer-paid health 

insurance premiums are included in supplements to 

wages and salaries and the medical care that is paid 

for by employer health plans is included in personal 

consumption expenditures.34 Payments made on 

34. For further examples of payments made in households’ behalf, see the 

BEA methodology paper Personal Consumption Expenditures at 

<www.bea.gov/bea/mp.htm>. 

Table 7. Economic Accounts for Households and Institutions 

Production Account 

Uses Sources 

Compensation of employees, paid 

Wages and salaries 

Supplements to wages and salaries 

Taxes on production and imports 

Less: Subsidies 

Consumption of fixed capital 

Net operating surplus 

Gross output 1 

Less: Intermediate goods and services 2 

Charges against gross value added and net 

operating surplus 

Gross value added 

Enterprise Income Account 

Uses Sources 

Interest and miscellaneous payments 

Current transfer payments 

Rental income of households and institutions with 

capital consumption adjustment 

Net operating surplus 

Interest receipts 

Interest payments, transfer payments, and 

rental income of persons 

Sources of income 

Income and Outlay Account 

Uses Sources 

Personal current taxes 

Personal outlays 

Personal consumption expenditures 

Interest payments 

Current transfer payments 

To government 

To the rest of the world 

Personal saving 

Compensation of employees, received 

Wages and salaries 

Domestic 

Rest of the world 

Supplements to wages and salaries 

Proprietors’ income with inventory valuation 

and capital consumption adjustments 

Rental income of households and institutions 

with capital consumption adjustment 

Income receipts on assets 

Interest received 

Dividends received 

Current transfer receipts 

From government 

From business 

Less: Contributions for government social 

insurance 

Current taxes, outlays, and saving Personal income 

Capital Account 

Uses Sources 

Gross investment Personal saving 

Net lending or borrowing Net capital transfers 

Consumption of fixed capital 

Gross investment and net lending Gross saving 

1. Consists of the sum of wages and salaries paid for domestic services, space rent for owner-occupied 

housing, and expenses of nonprofit institutions serving households for nonprofit services. The expenses of 

nonprofit institutions consist of compensation of employees, intermediate goods and services, taxes on production and imports (less subsidies), consumption of fixed capital, and mortgage interest. 

2. Consists of the spending of homeowners that would be treated as business expenses by owners of rental 

property, and purchases of intermediate goods and services by nonprofit institutions serving households. 
18 

households’ behalf are included on both sides of the 

account because they represent sources and uses of income. 

Compensation of employees. Although a general 

definition for compensation of employees was given in 

the discussion of the economic accounts for a corporation, there are two notable characteristics about the related measure that appears on the right side of the 

income and outlay account for households and institutions. First, this measure consists of compensation that 

is received from all sectors within the domestic economy and the rest of the world, including payments 

from other households and institutions. Second, this 

measure includes both receipts-in-kind that represent 

income as well as employer contributions to employee 

pension and insurance plans and employer contributions for government social insurance. 

Proprietors’ income. This measure consists of the 

net earnings of sole proprietors and partnerships, 

which is treated in the accounts as being distributed by 

business to households. 

Rental income of persons. This measure consists of 

both the rental income associated with owner-occupied housing and nonresidential fixed assets owned by 

NPISHs and the rental income of other private business, which is treated as being distributed by businesses to households. 

Current transfer receipts. Current transfer receipts 

from government, which are called government social 

benefits in the NIPAs, primarily consist of payments 

that are received by households from social insurance 

funds and government programs. These funds and 

programs include social security, hospital insurance, 

unemployment insurance, railroad retirement, workers’ compensation, food stamps, medical care, family 

assistance, and education assistance. Current transfer 

receipts from business consist of liability payments for 

personal injury that are received by households, net insurance settlements that are received by households, 

and charitable contributions that are received by 

NPISHs. 

Contributions for government social insurance. 

This item consists of payments made by employers, 

employees, self-employed, and other individuals that 

participate in government programs. These programs 

include social security, hospital insurance, supplemental medical insurance, unemployment insurance, railroad retirement, veterans’ life insurance, and 

temporary disability insurance. Although contributions to such programs constitute a use of income, they 

are deducted from the sources of income on the right 

side of the account. This practice is followed so that 

personal income includes only government social benefits received by the sector rather than both benefits 

Methodology Paper 1 

and contributions associated with the same programs. 

Personal current taxes. This item, which appears 

on the left side of the account, consists of taxes that are 

paid by households. These include Federal and state 

income taxes and state and local taxes on property 

other than homes, motor vehicle license payments, and 

other personal license payments. State and local property taxes on homes are excluded from this measure 

because they are treated as taxes on production. 

Personal consumption expenditures (PCE). This 

measure is simply defined as the value of final goods 

and services that are purchased by persons. However, 

there are three noteworthy characteristics about this 

measure. First, purchases of homes by households and 

of fixed assets by NPISHs are excluded from PCE because they are classified as fixed investment. Second, 

although some analysts consider consumer durable 

goods to be investment, the NIPAs included them in 

PCE.35 Purchases of consumer durable goods are included in PCE because they are primarily used for 

nonmarket household production, which is considered 

outside the scope of GDP and the NIPAs. Third, PCE 

includes the value of services provided by NPISHs for 

the benefit of households as a whole. The value of these 

services is indirectly calculated by subtracting sales 

from the measure of NPISHs’ output for the reasons 

mentioned above. 

Current transfer payments. Current transfer payments to general government in this account primarily 

consist of donations, fees, and fines that are paid by 

households and NPISHs to Federal, state, and local 

governments. Current transfer payments to the rest of 

the world in this account primarily consist of cash and 

in-kind transfers to foreign residents by households 

and NPISHs. 

Personal saving. This measure is the difference 

between current income and current outlays and 

taxes—that is, personal consumption expenditures, interest payments, current transfer payments, and current taxes. This measure is conceptually equivalent to 

undistributed corporate profits in the sense that both 

measures represent current income that is retained for 

future use or investment. 

Since personal saving is the residual claim on current income, its value can be negative over a number of 

accounting periods. Such an occurrence is perhaps 

better understood by considering that current income 

is not the only source of funds that can be used to 

35. In the NIPAs, consumer durable goods are defined as tangible commodities that have an average life of three or more years. Although consumer durable goods are treated as consumption in the NIPAs, the value of 

the stock of such goods is included in the BEA’s tables of fixed assets and 

consumer durable goods. In addition, the value of the stock of consumer 

durable goods is included in the net worth measures that are maintained in 

the Federal Reserve Board’s FFAs. 
Methodology Paper 1 19 

finance current consumption. In particular, households and institutions can finance current consumption by using savings from previous periods, by selling 

financial or fixed assets, or by borrowing. Indeed, in 

the short-run, an individual household’s saving is unlikely to be positive when it makes a major purchase, 

such as an automobile; even at the aggregate level, personal saving may become negative when an unusually 

large number of households and institutions make 

such purchases. 

As often noted, personal saving, along with personal 

income, exclude capital gains. Nevertheless personal 

saving is still a useful measure for examining the funds 

that are made available by households and institutions 

to finance new investment. This is because capital 

gains represent changes in the value of existing assets 

and are not a source of new funds for the economy as a 

whole. 

Despite its usefulness, the NIPA measure of personal 

saving may not be the appropriate measure for some 

types of analyses that focus on households and institutions. For example, analyses that examine whether 

households are saving enough for retirement may be 

better off focusing on households stocks of net wealth, 

which can be used to finance future consumption.36 

Capital account 

The structure of the capital account for households 

and institutions is almost identical to that for the business sector. Investment in this sector consists of the 

purchase of housing. Net capital transfers in this sector 

are equal to transfer receipts, which consist of assets 

that are brought into the United States by immigrants, 

less transfer payments, which consist of assets removed 

from the United States by emigrants and of estate taxes 

that are paid to general government. 

General Government Sector 

The NIPA general government sector consists of all 

Federal Government and state and local government 

agencies except government enterprises. 

Governments play many roles in the economy, and 

the NIPAs provide measures related to at least four of 

these roles. These include providing nonmarket services for consumption by the general public, investing 

in assets to provide infrastructure for the economy, 

providing social benefits to individuals in society, and 

contributing to domestic saving and investment. 

Many of the measures that appear in the general 

government accounts have already been addressed in 

the previous sections. For instance, the measure of per36. For a further discussion of usefulness of personal saving in particular 

types of analyses, see Marshall B. Reinsdorf, “Alternative Measures of Personal Savings,” SURVEY 87 (February 2007): 7–13. 

sonal current taxes that appears as a source of income 

for general government is the same as the measure of 

personal income taxes that appear as a use of income 

for households and institutions.37 The structure of the 

accounts for the general government sector also resembles that for households and institutions. However, 

there is no enterprise income account for government 

enterprises, because of limitations in source data. 

There are also enough differences between the remaining accounts to warrant a separate discussion for each 

new account. 

Production account 

Because governments primarily rely on tax receipts 

and transfer payments to cover their expenditures, 

sales are not a good measure of the value of their gross 

output. As a result, gross output for general government is measured by the expenditures that are made to 

provide goods and services for public consumption, 

but it excludes expenditures for other purposes—for 

example, social benefits paid to persons, interest payments, and subsidies. 

Gross output for general government, which appears on the right side of the account, is calculated as 

the sum of compensation of employees, purchases of 

intermediate goods and services, and CFC (as a partial 

measure of the services of government capital; first 

panel of table 8). Since purchases of intermediate 

goods and services are subtracted from gross output to 

arrive at gross value added, the account is kept in balance by including compensation of employees and 

CFC on the left side of the account. 

BEA recognizes that the inclusion of a measure of 

net operating surplus in the production account for 

general government would improve consistency within 

a full set of national accounts; this practice would also 

involve choosing a model and using independent 

source data to estimate the value of a net return to 

fixed assets. Since the advisory group that has been 

tasked to recommend updates to the SNA has called 

for research on to how to measure such a net return in 

a set of national economic accounts, the production 

account for this sector presently only includes a measure of CFC, which is an incomplete measure of the 

cost of capital services derived from such goods. 

Income and outlay account 

The income and outlay account for general government resembles the corresponding account for households and institutions. However, the nature of income 

receipts and expenditures that are recorded in the two 

37. Since each measure in the summary accounts of the NIPAs has a 

counter-entry, additional examples of such relationships can be found in 

table 9. 
20 

Table 8. Economic Accounts for General Government 

Production Account 

Uses Sources 

Compensation of employees, paid Gross output 1 

Wages and salaries Less: Intermediate goods and services 

Supplements to wages and salaries 

Consumption of fixed capital 

Charges against gross value added Gross value added 

Income and Outlay Account 

Uses Sources 

Consumption expenditures 

Current transfer payments 

Government social benefits 

To persons 

To the rest of the world 

Other current transfer payments to the rest of 

the world 

Interest payments 

Subsidies 

Less: Wage accruals less disbursements 

Government saving 

Current tax receipts 

Personal current taxes 

Taxes on production and imports 

Taxes on corporate income 

Taxes from the rest of the world 

Contributions for government social insurance 

Income receipts on assets 

Interest and miscellaneous receipts 

Dividends 

Current transfer receipts 

From business (net) 

From persons 

Current surplus of government enterprises 

Current expenditures and net saving Current receipts 

Capital Account 

Uses Sources 

Gross investment Government saving 

Acquisition less disposal of non-produced Net capital transfers 

nonfinancial assets Consumption of fixed capital 

Net lending or borrowing 

Gross investment and net lending Gross saving 

1. Consists of compensation of employees, intermediate goods and services, and consumption of fixed 

capital. 

accounts differ. Whereas the primary sources of income for households and institutions are income receipts from providing resources for production, the 

primary sources of income for the general government 

are current tax receipts and contributions for government social insurance (second panel of table 8). General government also does not use income receipts 

mainly for financing consumption expenditures. 

Rather, much of the income received by general government is also used to provide current transfer payments to households. 

Another difference between the two accounts involves the particular accounting entries that are offset 

against one another to avoid double counting. For 

households, payments and receipts of charitable contributions between households and institutions are 

offset against one another. For general government, income payments and receipts between the Federal Government and the state and local governments, which 

are called grants-in-aid in the NIPAs, are offset against 

one another. As a result, grants-in-aid are excluded 

from the measures of the consolidated government account, though they are included in the separate acMethodology Paper 1 

counts for the Federal Government and for state and 

local governments. This practice avoids a potential 

source of double counting in the measures of government receipts and expenditures. 

In addition to the offsetting of grants-in-aid, revenue from sales to other sectors is deducted from the 

total expenditures of general government in the formation of the measure of government consumption expenditures. As with the offsetting of the sales of 

NPISHs against the expenditures of households and 

institution expenditures, this practice avoids double 

counting in GDP because such sales are already reflected in the measures of PCE and exports or are considered purchases of intermediate goods and services 

by business. 

Government consumption expenditures. This 

item, which appears on the right side of the account, 

provides a measure of the value of services produced 

by government for the benefit of society as a whole. 

Examples of such services include national defense, 

public education, and police and fire protection. The 

value of government consumption expenditures is indirectly calculated by subtracting own-account investment, which is counted as part of government gross 

investment, and sales to other sectors from the measure of government gross output for the reason mentioned above. 

Wage accruals less disbursements. This item consists of wages and salaries earned less wages and salaries paid. It is subtracted from expenditures on the left 

side of account so that the measure of net government 

saving on an accounting basis is comparable to that of 

personal saving. This can be understood by noting that 

the wages and salaries in government consumption expenditures are on an accrual basis.. 

Net government saving. This item is the residual 

claim on government current receipts once current expenditures have been deducted. This measure reflects, 

among other factors, the transactions that are covered 

(for example, transactions of government employee retirement plans) and the time at which transactions are 

recorded that make it different from measures of surpluses or deficits that are included in government budgets.38 

Capital account 

The structure of the capital account for general government is almost identical to that for households and 

institutions. In fact, the only structural difference is 

38. For a more detailed discussion of the relationship between the Federal 

deficits or surpluses and NIPA net saving, see Mary L. Roy and Andrew P. 

Cairns, “Federal Budget Estimates for Fiscal Year 2009,” SURVEY 87 (March 

2007): 10–21. 
Methodology Paper 1 21 

that the account for the general government includes a 

measure for the net acquisition of nonproduced nonfinancial assets from the business sector. 

Although the structure of the related accounts is 

similar to those of the business sector, the measure of 

gross investment differs because it excludes changes in 

inventories. Although their inclusion would improve 

overall consistency in the NIPAs, a complete set of data 

that could be used to construct such a related measure 

is not available. 
22 

IV. NIPA Summary Accounts
 
 
 

T HIS section provides the conceptual framework 

for the NIPA summary accounts: 

● The domestic income and product account 

● The private enterprise income account 

● The personal income and outlay account 

● The government receipts and expenditures account 

● The foreign transactions current account 

● The domestic capital account 

● The foreign transactions capital account 

Since the personal income and outlay account and 

the government receipts and expenditure account are 

identical to the related income and outlay accounts 

that were presented for each of the related sectors in 

the last section, only the remaining accounts need further discussion. 

Domestic income and product account 

This account mainly consists of an aggregation of the 

underlying production accounts for all domestic sectors. However, a major difference between the related 

accounts is that the right side of the domestic income 

and product account measures GDP by using the expenditure approach rather than the value-added approach (first panel of table 9). This means that GDP is 

calculated in the NIPAs as the sum of PCE, gross private domestic investment, net exports of goods and 

services, and government consumption expenditures 

and gross investment. Longtime users of the accounts 

are familiar with this derivation of GDP. 

Although measures of gross output, intermediate 

goods and services, and gross value added by sector are 

not presented in the domestic income and product account, measures of gross value added by sector can be 

found in NIPA table 1.3.5. In addition, measures of 

gross output, intermediate goods and services, and 

gross value added by industry can be found in the 

BEA’s industry accounts. 

GDI, which appears on the left side of the account, 

includes a measure of wage and salary accruals. However, the account also provides measures for wage and 

salary disbursements and for wage accruals less disbursements to identify counter-entries in the complete 

set of summary accounts. 

Although most of the measures that appear in the 

domestic income and product account have already 

been introduced, a few of the new measures should be 

explained. 

Gross private domestic investment. This item, 

which appears on the right side of the account, consists 

of the sum of gross private fixed investment and 

change in private inventories. Gross private fixed investment consists of purchases of fixed assets by businesses and NPISHs and of the construction of new 

housing for households. 

Net exports of goods and services. This measure is 

defined as exports less imports. Exports are added on 

the right side of the account because they are part of 

the value of final goods and services produced in the 

United States that are not included in the other measures of final expenditures in the account. Imports, 

which include purchases of both final and intermediate goods and services, are subtracted on the right side 

of the account because they are produced outside of 

the United States but are included in the other measures of final expenditures. 

Statistical discrepancy. Although the value of GDI 

should equal the value of GDP, in practice, the values 

of these measures often differ. This is because each is 

calculated using a different set of methodologies and 

data sources. The statistical discrepancy that appears 

on the left side of the account shows how much the 

two measures differ. 

BEA views GDP as a more reliable measure of output than GDI because it considers the source data underlying GDP to be more timely and accurate. For 

instance, most of the annual source data used for estimating GDP are based on complete enumerations, 

such as Federal Government budget data, or are regularly adjusted to such enumerations, such as the quinquennial economic and government censuses. GDP is 

also based largely on the detailed benchmark inputoutput accounts that are available every five years. For 

GDI, only the annual tabulations of employment tax 

returns and Federal Government budget data are 

based on complete enumerations, and only farm 

proprietors’ income and state and local government 

budget data are adjusted to complete enumeration. 

Most of the remaining components of GDI are calculated using tabulations of samples of tax returns, 

which become available for a given year with a more 
Methodology Paper 1 23 

considerable lag than much of the data that is used to 

estimate GDP.39 

Private enterprise income account 

There are two main differences between the private enterprise income account and the business enterprise 

income account that was presented in the last section. 

First, the private enterprise income account consists of 

an aggregation of the private income accounts for both 

the business and the households and institutions sectors (second panel of table 9). Second, the private enterprise income account excludes interest and transfer 

transactions and the surplus associated with government enterprises, which are shown in the government 

receipts and expenditures account. 

As noted earlier, the right side of the private enterprise income account shows the sources of income as 

the net operating surplus and income receipts of businesses on assets (such as financial assets and equity in 

other businesses). The left side of the account shows 

the uses of income as income payments on assets (such 

as holders of financial liabilities and equity claims of 

other businesses), business current transfer payments, 

and income that accrues to the owners of business 

(namely proprietors’ income, rental income of persons, and corporate profits). Corporate profits, a 

widely used measure in the United States, is distributed 

to government (taxes on corporate income) and to 

shareholders (net dividends), or is retained by the corporations (undistributed corporate profits). 

Foreign transactions current account 

This account shows the current payments received 

from the United States by the rest of the world and the 

current receipts received by the United States from the 

rest of the world. The balance on this account is equal 

to U.S. exports of goods and services and income receipts from the rest of the world less U.S. imports of 

goods and services, income payments to the rest of the 

world, and current tax and net current transfer payments made to the rest of the world. This balance is 

39. For a further discussion of the statistical discrepancy, see Robert B. 

Parker and Eugene P. Seskin, “Annual Revision of the National Income and 

Product Accounts,” SURVEY 77 (August, 1997): 6–35. 

closely related to the current account in the international transactions accounts. The current account balance can be viewed as the acquisition of foreign assets 

by U.S. residents less the acquisition of U.S. assets by 

foreign residents. 

Domestic capital account 

This account consists of an aggregation of the capital 

accounts for each sector that contributes to domestic 

output, where net saving is equal to the sum of personal saving, undistributed corporate profits, wage accruals less disbursements, and net government saving. 

However, there are two notable differences between 

this account and those presented for each individual 

sector. 

The first difference is that the domestic capital account combines the measures of net capital transfers 

and of acquisitions and disposals of nonproduced 

nonfinancial assets into a single measure of “capital 

account transactions” on the left side of the account (sixth panel of table 9). This practice simplifies the structure of the domestic capital account and 

the system of counter-entries in the summary accounts. 

The second difference is that the domestic capital 

account includes the statistical discrepancy on the 

right side of the account. The measures of saving that 

are carried forward into this account are ultimately 

based on measures of income that is generated from 

production. By including the statistical discrepancy, 

the measure of saving at the bottom of the account becomes more consistent with the measure of the value 

of final goods and services that BEA believes is more 

accurate. 

Foreign transactions capital account 

This account subtracts net capital transactions with 

the rest of the world from the balance on the foreign 

transactions current account to derive the net lending 

or borrowing position that the United States has with 

the rest of the world. The measures of net capital transactions and of net lending or borrowing in this account are identical to those included in the domestic 

capital account. 
24 Methodology Paper 1 

Table 9. Summary National Income and Product Accounts, 2006 
 

[Billions of dollars] 

Account 1. Domestic Income and Product Account 

Line Line 

1 
Compensation of employees, paid .........................................................................
 
 7,454.8 15 
Personal consumption expenditures (3–3) ............................................................
 
 9,224.5 
 


2 
 Wage and salary accruals..................................................................................
 
 6,032.2 16 
 Durable goods ...................................................................................................
 
 1,048.9 
 


3 
 Disbursements (3–12 and 5–11)....................................................................
 
 6,024.7 17 
 Nondurable goods .............................................................................................
 
 2,688.0 
 


4 
 Wage accruals less disbursements (4–9 and 6–11) ......................................
 
 7.5 18 
 Services.............................................................................................................
 
 5,487.6 
 


5 
 Supplements to wages and salaries (3–14) .......................................................
 
 1,422.6 19 
Gross private domestic investment........................................................................
 
 2,209.2 
 


6 
Taxes on production and imports (4–16) ................................................................
 
 967.3 20 
 Fixed investment (6–2) ......................................................................................
 
 2,162.5 
 


7 
Less: Subsidies (4–8).............................................................................................
 
 49.7 21 
 Nonresidential................................................................................................
 
 1,397.7 
 


8 
Net operating surplus.............................................................................................
 
 3,225.3 22 
 Structures ..................................................................................................
 
 405.1 
 


9 
 Private enterprises (2–19)..................................................................................
 
 3,239.2 23 
 Equipment and software............................................................................
 
 992.6 
 


10 
 Current surplus of government enterprises (4–26) ............................................
 
 –13.9 24 
 Residential.....................................................................................................
 
 764.8 
 


11 
Consumption of fixed capital (6–13).......................................................................
 
 1,615.2 25 
 Change in private inventories (6–4)...................................................................
 
 46.7 
 


26 
Net exports of goods and services ........................................................................
 
 –762.0 
 


12 
Gross domestic income ......................................................................................
 
 13,212.8 27 
 Exports (5–1).....................................................................................................
 
 1,467.6 
 


28 
 Imports (5–9) .....................................................................................................
 
 2,229.6 
 


13 
Statistical discrepancy (6–19) ................................................................................
 
 –18.1 29 
Government consumption expenditures and gross investment (4–1 and 6–3)...... 
 2,523.0 
 

30 
 Federal...............................................................................................................
 
 932.5 
 


31 
 National defense............................................................................................
 
 624.3 
 


32 
 Nondefense ...................................................................................................
 
 308.2 
 


33 
 State and local...................................................................................................
 
 1,590.5 
 


14 
GROSS DOMESTIC PRODUCT............................................................................
 
 13,194.7 34 
GROSS DOMESTIC PRODUCT ...........................................................................
 
 13,194.7 
 


Account 2. Private Enterprise Income Account 

Line Line 

1 Income payments on assets................................................................................... 
 3,109.3 19 
Net operating surplus (1–9) ................................................................................... 
 3,239.2 

2 Interest and miscellaneous payments (3–20 and 4–21) .................................... 
 2,946.8 20 
Income receipts on assets..................................................................................... 
 2,575.3 

3 Dividend payments to the rest of the world (5–14)............................................. 
 91.4 21 
 Interest (3–20) ................................................................................................... 
 2,155.5 

4 Reinvested earnings on foreign direct investment in the United States (5–15) 71.1 22 Dividend receipts from the rest of the world (5–6)............................................. 
 167.2 

5 Business current transfer payments (net) .............................................................. 
 90.2 23 
 Reinvested earnings on U.S. direct investment abroad (5–7)............................ 
 252.6 

6 To persons (net) (3–24) ...................................................................................... 
 27.2 
 

7 
 To government (net) (4–24)................................................................................ 
 60.6 
 

8 
 To the rest of the world (net) (5–19) ................................................................... 
 2.5 
 

9 
Proprietors’ income with inventory valuation and capital consumption 
 

adjustments (3–17) ............................................................................................ 
 1,006.7 
 

10 
Rental income of persons with capital consumption adjustment (3–18) ................ 
 54.5 
 

11 
Corporate profits with inventory valuation and capital consumption adjustments 
 1,553.7 
 

12 
 Taxes on corporate income ................................................................................ 
 453.9 
 

13 
 To government (4–17) .................................................................................... 
 435.5 
 

14 
 To the rest of the world (5–19) ....................................................................... 
 18.4 
 

15 
 Profits after tax with inventory valuation and capital consumption adjustments 
 1,099.8 
 

16 
 Net dividends (3–21 and 4–22) ...................................................................... 
 698.9 
 

17 
 Undistributed corporate profits with inventory valuation and capital 
 

consumption adjustments (6–10)............................................................... 
 400.9 


18 USES OF PRIVATE ENTERPRISE INCOME ........................................................ 
 5,814.5 24 
SOURCES OF PRIVATE ENTERPRISE INCOME................................................ 
 5,814.5 

Account 3. Personal Income and Outlay Account 

Line Line 

1 Personal current taxes (4–15) ................................................................................ 
 1,354.3 10 
Compensation of employees, received .................................................................. 
 7,440.8 

2 Personal outlays ..................................................................................................... 
 9,590.3 11 
 Wage and salary disbursements ....................................................................... 
 6,018.2 

3 Personal consumption expenditures (1–15) ....................................................... 
 9,224.5 12 
 Domestic (1–3 less 5–11).............................................................................. 
 6,015.3 

4 Personal interest payments (3–20) .................................................................... 
 238.0 13 
 Rest of the world (5–3) .................................................................................. 
 2.9 

5 Personal current transfer payments ................................................................... 
 127.8 14 
 Supplements to wages and salaries (1–5) ........................................................ 
 1,422.6 

6 To government (4–25) .................................................................................... 
 78.9 15 
 Employer contributions for employee pension and insurance funds.............. 
 970.7 

7 To the rest of the world (net) (5–17) ............................................................... 
 48.9 16 
 Employer contributions for government social insurance............................... 
 451.8 

17 Proprietors’ income with inventory valuation and capital consumption 
 

8 
Personal saving (6–9) ............................................................................................ 
 38.8 
 adjustments (2–9).............................................................................................. 
 1,006.7 

18 Rental income of persons with capital consumption adjustment (2–10)................ 
 54.5 

19 Personal income receipts on assets ...................................................................... 
 1,796.5 

20 Personal interest income (2–2 and 3–4 and 4–7 and 5–5 less 2–21 less 4–21 

less 5–13) ...................................................................................................... 1,100.2 

21 Personal dividend income (2–16 less 4–22)...................................................... 
 696.3 

22 Personal current transfer receipts .......................................................................... 
 1,612.5 

23 Government social benefits (4–4)...................................................................... 
 1,585.3 

24 From business (net) (2–6).................................................................................. 
 27.2 

25 Less: Contributions for government social insurance (4–19)................................. 
 927.6 


9 PERSONAL TAXES, OUTLAYS, AND SAVING.................................................... 
 10,983.4 26 
PERSONAL INCOME ........................................................................................... 
 10,983.4 
Methodology Paper 1 25 

Account 4. Government Receipts and Expenditures Account 

Line Line 

1 Consumption expenditures (1–29) ......................................................................... 2,089.3 14 Current tax receipts ............................................................................................... 2,769.8 

2 Current transfer payments...................................................................................... 1,618.3 15 Personal current taxes (3–1) ............................................................................. 1,354.3 

3 Government social benefits ............................................................................... 1,588.7 16 Taxes on production and imports (1–6) ............................................................. 967.3 

4 To persons (3–23) .......................................................................................... 1,585.3 17 Taxes on corporate income (2–13) .................................................................... 435.5 

5 To the rest of the world (5–18) ....................................................................... 3.3 18 Taxes from the rest of the world (5–18) ............................................................. 12.6 

6 Other current transfer payments to the rest of the world (net) (5–18) ................ 29.6 19 Contributions for government social insurance (3–25) .......................................... 927.6 

7 Interest payments (3–20) ....................................................................................... 372.9 20 Income receipts on assets..................................................................................... 111.9 

8 Subsidies (1–7) ...................................................................................................... 49.7 21 Interest and miscellaneous receipts (2–2 and 3–20)......................................... 109.3 

9 Less: Wage accruals less disbursements (1–4)..................................................... 0.0 22 Dividends (3–21) ............................................................................................... 2.6 

10 Net government saving (6–12)............................................................................... –195.4 23 Current transfer receipts ........................................................................................ 139.5 

11 Federal ............................................................................................................... –220.0 24 From business (net) (2–7) ................................................................................. 60.6 

12 State and local ................................................................................................... 24.6 25 From persons (3–6) ........................................................................................... 78.9 

26 Current surplus of government enterprises (1–10)................................................ –13.9 

13 GOVERNMENT CURRENT EXPENDITURES AND NET SAVING....................... 3,934.8 27 GOVERNMENT CURRENT RECEIPTS ............................................................... 3,934.8 

Account 5. Foreign Transactions Current Account 

Line Line 

1 Exports of goods and services (1–27) ................................................................... 

2 Income receipts from the rest of the world............................................................. 

3 Wage and salary receipts (3–13) ....................................................................... 

4 Income receipts on assets ................................................................................. 

5 Interest (3–20)................................................................................................ 

6 Dividends (2–22)............................................................................................ 

7 Reinvested earnings on U.S. direct investment abroad (2–23) ...................... 

1,467.6 

691.4 

2.9 

688.6 

268.8 

167.2 

252.6 

9 Imports of goods and services (1–28) ................................................................... 

10 Income payments to the rest of the world.............................................................. 

11 Wage and salary payments (1–3)...................................................................... 

12 Income payments on assets .............................................................................. 

13 Interest (3–20) ............................................................................................... 

14 Dividends (2–3) ............................................................................................. 

15 Reinvested earnings on foreign direct investment in the United States (2–4) 

16 Current taxes and transfer payments to the rest of the world (net)........................ 

17 From persons (net) (3–7)................................................................................... 

18 From government (net) (4–5 and 4–6 less 4–18) .............................................. 

19 From business (net) (2–8 and 2–14) ................................................................. 

20 Balance on current account, national income and product accounts (7–1)........... 

2,229.6 

633.4 

9.4 

624.0 

461.5 

91.4 

71.1 

90.1 

48.9 

20.3 

20.9 

–794.1 

8 CURRENT RECEIPTS FROM THE REST OF THE WORLD................................ 2,159.0 

21 CURRENT PAYMENTS TO THE REST OF THE WORLD AND BALANCE ON 

CURRENT ACCOUNT ...................................................................................... 2,159.0 

Account 6. Domestic Capital Account 

Line Line 

1 Gross domestic investment.................................................................................... 2,642.9 8 Net saving.............................................................................................................. 251.7 

2 Private fixed investment (1–20).......................................................................... 2,162.5 9 Personal saving (3–8)........................................................................................ 38.8 

3 Government fixed investment (1–29) ................................................................. 433.8 10 Undistributed corporate profits with inventory valuation and capital 

4 Change in private inventories (1–25) ................................................................. 46.7 consumption adjustments (2–17) .................................................................. 400.9 

5 Capital account transactions (net) (7–2) ................................................................ 3.9 11 Wage accruals less disbursements (private) (1–4) ........................................... 7.5 

6 Net lending or net borrowing (–), national income and product accounts (7–3)..... –798.0 12 Net government saving (4–10) .......................................................................... –195.4 

13 Plus: Consumption of fixed capital (1–11) ............................................................. 1,615.2 

14 Private ............................................................................................................... 1,347.5 

15 Government....................................................................................................... 267.7 

16 General government...................................................................................... 223.6 

17 Government enterprises................................................................................ 44.1 

18 Equals: Gross saving............................................................................................. 1,866.9 

7 GROSS DOMESTIC INVESTMENT, CAPITAL ACCOUNT TRANSACTIONS, 19 Statistical discrepancy (1–13) ............................................................................... –18.1 

AND NET LENDING.......................................................................................... 1,848.8 20 GROSS SAVING AND STATISTICAL DISCREPANCY........................................ 1,848.8 

Account 7. Foreign Transactions Capital Account 

Line Line 

1 BALANCE ON CURRENT ACCOUNT, NATIONAL INCOME AND PRODUCT 

ACCOUNTS (5–20) ........................................................................................... –794.1 

2 Capital account transactions (net) (6–5)................................................................ 

3 Net lending or net borrowing (–), national income and product accounts (6–6) .... 

4 CAPITAL ACCOUNT TRANSACTIONS (NET) AND NET LENDING, NATIONAL 

INCOME AND PRODUCT ACCOUNTS ........................................................... 

3.9 

–798.0 

–794.1 

NOTE. Numbers in parentheses indicate accounts and items of counterentry in the accounts. For example, line 5 of account 1 is shown as “Supplements to wages and salaries (3–14)”; the counterentry is shown in account 3, line 14.