The sequence of accounts is a way of organising all the transactions in the economy in a logical way that relates them all together.

There are seven accounts in the Non-Financial sequence of accounts which take us from Output all the way to Net Lending. Each account describes one stage in the economic cycle of transactions. The accounts are shown by Institutional Sector (Corporations, Government, Households etc.), and what is paid by one sector is received by another sector.

The sequence of accounts uses balancing items as the values that link the accounts together. The balancing item in an account is the difference between what is received and what is paid by a sector, just like in company accounts the profit is the balancing item between income and expenditure. Each balancing item at the end of one account is then the opening balancing item at the start of the next account. There are twelve balancing items in the accounts. An example will help to explain the sequence.

Example 1:  The Brewery

In this example we will look at the sequence of accounts showing how the transactions of a fictional brewery would be treated in the accounts. In practice, these transactions would be included in the total transactions of Non-Financial Corporations.

Production Account: The starting point is Output, which is similar to total sales. The brewery sells €10m worth of beer, which is their Output. Their costs include hops, yeast, barley, water, heat, light and other running costs of €4m, which is their Intermediate Consumption. The balancing item in the Production Account is Gross Value Added (GVA), which is calculated as Output minus Intermediate Consumption. Hence GVA here is €10m - €4m = €6m.

For the total economy, the balancing item in the Production Account is Gross Domestic Product.

Generation of Income Account: This account takes GVA calculated in the Production Account and shows where it goes. The GVA is broken down into what is paid to Government, Compensation of Employees and what is kept by the business as their Gross Operating Surplus. For the brewery, the GVA is €6m. The brewery pays their workers €2m (which includes all wages, PRSI, pension contributions, benefits in kind), and pays the Government €0.1m as Taxes on the production process (such as Local Authority Rates). So the Gross Operating Surplus of the brewery is

€6m – €0.1m - €2m = €3.9m.

This Gross Operating Surplus is the balancing item in the Generation of Income Account. While the definitions are different in company accounting, the Gross Operating Surplus is quite similar to the Earnings before Interest, Tax, Depreciation and Amortisation.

Allocation of Primary Income Account: In this account we see how capital, labour, and Government receive their income from the brewery’s operations. The brewery’s account opens with the Gross Operating Surplus from the Generation of Income Account, which was €3.9m. The brewery pays a dividend to its owners (those who have invested capital in the brewery) of €1m, and it pays interest on its loans (to those who have lent capital to the brewery) of €0.4m. These dividends and interest are Property Income, or return to capital. What is left with the brewery is called the Balance of Primary Incomes (for the total economy, the Balance of Primary Incomes is the Gross National Income). So for the brewery:

Gross Operating Surplus – Dividend – Interest = Balance of Primary Incomes

€3.9m - €1m – €0.4m = €2.5m

The dividend and interest shown as being paid here are shown as being received by the other parties in these transactions. For instance, the interest is received by a bank. The Compensation of Employees (labour) of €2m we saw being paid by the brewery in the Generation of Income Account is shown as being received by the workers in the sequence of accounts for the Household sector. The taxes are shown being received by the Government in their sequence of accounts.

Distribution of Secondary Income Account: This account shows how income is redistributed through taxes and other transfers. The opening item in the account is the Balance of Primary Incomes (€2.5m for the brewery). The brewery has to pay corporation tax on its profits of €0.2m, and after this tax the brewery is left with €2.3m. This balancing item at the end of the account is called the Gross Disposable Income.

The Distribution of Secondary Income Account has more items for Households and Government, because this account also has transactions which are generally not very significant for non-financial companies, social protection payments, pension contributions and other Secondary Transfers like charitable donations.

The Use of Disposable Income Account: this account opens with the balancing item Gross Disposable Income and closes with the balancing item Gross Saving. The transactions in this account are Final Consumption Expenditure and Adjustment for the Change in Pension Entitlements. Final Consumption Expenditure is only for Government, Households and Non-Profits. The adjustment for the change in pension entitlements affects Financial Corporations and Households in Ireland's national accounts. Therefore, there are no transactions for the brewery in this account, so the Gross Saving of the brewery is €2.3m, the same as its Gross Disposable Income.

Change in Net Worth due to Saving and Capital Transfers Account: This opens with Gross Saving (€2.3m for our brewery) and it then looks at the capital transfers. Our brewery has received an investment grant (capital transfer) from Government of €0.2m to renovate the brewery building and this is added to the opening balance. The brewery owns buildings and equipment that decline in value over time due to wear and tear, and this depreciation (called Consumption of Fixed Capital in National Accounts) of €0.5m is deducted in this account to give the change in net worth. The balancing item at the end of the Change in Net Worth due to Saving and Capital Transfers Account is, as you might expect, called the Changes in Net Worth due to Saving and Capital Transfers, so for the brewery this is

€2.3m - €0.5m + €0.2m = €2.0m

This is the first account where depreciation has been deducted so the balancing item is called the ‘net’, whereas all the previous items have been ‘gross’ (Gross Value Added and so on).

Acquisition of Non-Financial Assets Account: The opening item in this account is Changes in Net Worth due to Saving and Capital Transfers (€2.0m in the case of the brewery), and the first thing we do is add back the depreciation we deducted in the previous account (€0.5m) so that we are again talking about values gross of depreciation. As the name implies, this account deals with acquisition and disposal of non-financial assets; that is Consumption of Fixed Capital and buying or selling Produced Non-Financial Assets and Non-Produced Non-Financial Assets (which includes land and trademarks). Our brewery spent €2m on a renovation of its premises this year (it got an investment grant of €0.2m from Government as we saw in the previous account) and this is treated as Fixed Capital Formation (acquisition of Produced Non-Financial Assets). The balancing item at the end of the account is called Net Lending (if it is greater than zero) or Net Borrowing (if it is less than zero). For the brewery the Net Lending will be:

Changes in Net Worth due to Saving and Capital Transfers plus Consumption of Fixed Capital less Capital Formation

Which is:

€2.0m + 0.5m - €2m = €0.5m Net Lending.

This is then passed to the Financial Account where it is used to buy financial assets or pay off financial liabilities. The brewery pays off €0.5m of its loan (we saw it paid interest on this loan in the Allocation of Primary Income Account), so its liabilities are reduced by €0.5m, its financial assets are unchanged, so its Net Lending has changed by €0.5m in the financial account.

In this case, ‘net’ in ‘Net Lending’ does not refer to Consumption of Fixed Capital, but to the ‘net’ of all the changes in assets and liabilities in the financial account.

There is another account for transactions with the rest of the world called the External Account, which is not relevant to our brewery. This shows two balancing items and the transactions that produce them: the net Exports which is the Current External Balance of Goods and Services and the Current External Balance. The External Balance is made up of the Goods and Services Balance and all primary and secondary transactions with the rest of the world.

The sequence of accounts has some features in common with business accounting. However, National Accounts also deals with sectors other than corporations, and is for a country as a whole, so it distinguishes different types of income and has several balancing items that give a range of indicators of a sector's economic performance.

 Sequence of Accounts for a Fictional Brewery (€ million) Account Transaction Received Paid Production Account Output 10 Intermediate Consumption 4 Gross Value Added 6 Generation of Income Account Gross Value Added 6 Compensation of Employees 2 Taxes on Production 0.1 Gross Operating Surplus 3.9 Allocation of Primary Income Account Gross Operating Surplus 3.9 Property Income: Interest 0.4 Property Income: Dividends 1 Balance of Primary Incomes 2.5 Distribution of Secondary Income Account Balance of Primary Incomes 2.5 Tax on Income (Corporation Tax) 0.2 Gross Disposable Income 2.3 The Use of Disposable Income Account Gross Disposable Income 2.3 Final Consumption and Adjustment…Pension Entitlements 0 Gross Saving 2.3 Change in Net Worth due to Saving and Capital Transfers Account Gross Saving 2.3 Capital Transfers 0.2 Consumption of Fixed Capital 0.5 Changes in Net Worth due to Saving and Capital Transfers 2 Acquisition of Non-Financial Assets Account Changes in Net Worth due to Saving and Capital Transfers 2 Consumption of Fixed Capital 0.5 Fixed Capital Formation 2 Net Lending 0.5