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Appendix 3 Links between business accounts and national accounts

Australian System of National Accounts: Concepts, Sources and Methods
Reference period
2020-21 financial year

A3.1    The gross domestic product account represents a consolidation of the trading accounts of individual enterprises. An enterprise engaged in trading (whether in production in the narrow sense, in distribution, or in the provision of other services), will have a 'production or trading account' which in simplified form will be something like the following

Table A3.1 Production account of a trading enterprise
 $'000 $'000
Opening inventories20Sales210
Wages and salaries100Subsidies2
Current purchases50Closing inventories25
Taxes on production and imports15  
Gross operating surplus52  

The two sides balance, the balancing item being gross operating surplus.

A3.2    This account can be simply rearranged to show the 'gross product' of the enterprise; that is, its contribution to gross domestic product. In rearranging the account, subsidies are offset against taxes on production and imports. An enterprise may regard a subsidy as little different from sales proceeds. However, in the national accounts, subsidies are regarded as transfer payments from general government, enabling enterprises to sell their output for less than would otherwise be the case. In this respect, they are exactly opposite in their effect to production taxes. The inventories entries are rearranged. Instead of 'opening inventories' and 'closing inventories', the entries are combined to become 'changes in (the value of) inventories' (during the accounting period). Each side now adds up to the total turnover of the business (additions to inventories being treated as turnover for this purpose). The 'gross product' of the enterprise is the sum of wages and salaries paid, the gross operating surplus and taxes less subsidies on production and imports and can be written in as a subtotal. Rearranged, the account now shows the following:

Table A3.2 Production account of a trading enterprise – Alternative form
 $'000 $'000
Wages and salaries100Sales210
Taxes less subsidies on production and imports13  
Gross operating surplus52Change in inventories5
Gross product165  
Current purchases50  

A3.3    A production account in the same form can be drawn up for a financial enterprise, although financial enterprises present a special problem (see paragraph A3.13 below). The following results are illustrative of production accounts in this form being consolidated for all enterprises. Current purchases by enterprises from other enterprises (i.e. purchases other than for capital purposes), which appear as both current purchases and sales, cancel out on both sides, and purchases from overseas (imports of goods and services) remain on the left side. On the right side, the only sales left are export sales, sales to buyers other than enterprises (i.e. to consumers and general government) and sales to enterprises for capital purposes (i.e. purchases by these enterprises which are not currently charged to their production accounts).

Table A3.3 Consolidated production account of all trading and financial enterprises
 $m $m
Wages and salaries150Sales to: 
Gross operating surplus50Consumers174
Taxes less subsidies on production and imports25General government (current)5
Gross product225General government (capital)5
Current purchase from general government1Enterprises for capital purposes45
Imports of goods and services40Overseas (i.e. exports of goods and services)35
  Changes in inventories2
Total turnover266Total turnover266

A3.4    The next stage in developing a production account for the whole economy is to add a production account for general government (public enterprises like railways, Australia Post, electricity and water supply undertakings, and government banks, are not included in general government because they are regarded as enterprises).

A3.5    The 'production account' for general government would be on the following lines:

Table A3.4 Production account for general government
 $m $m
Wages and salaries40Charges made for services to: 
Current purchases from enterprises5Consumers2
Imports of goods and services1Enterprises1
Consumption of fixed capital5Balance48

A3.6    If general government were treated in the same way as enterprises, the 'balance' would have to be considered a gross operating loss. The reason is that the payments for wages and salaries and other purchases by general government bodies considerably exceed the small amounts they receive by charging for their services (e.g. charges made by government schools for sales or hire of textbooks). Their major source of income is from income taxation, and this does not appear in their production accounts.

A3.7    The 'output' of general government is not measured, for national accounting purposes, by the charges it makes for its services. Instead, it is valued, by convention, according to the cost of supplying the services; that is, the total of the items on the left side of the above account (which, of course, is equal to the total of the items on the right side). In effect, general government as a producer is regarded, apart from the minor charges to other sectors, as producing goods and services for 'sale' (at net cost) to a general government income account for final use by general government. The item called 'balance' in the above table is therefore renamed 'government final consumption expenditure'.

A3.8    This 'production account' for general government can now be consolidated with that for enterprises. Current purchases from enterprises and charges made to enterprises cancel out with the corresponding items in the enterprise production account. Imports of goods and services become the total for the whole economy. The remaining wages and salaries to be added are those paid by persons (to domestic servants, etc.), and those paid by non-profit organisations, whose activities are here included with those of persons. If these wages and salaries are added to the left side and the value of the equivalent services to persons are added to the right side (as a form of 'production account' for these activities), total wages and salaries for the whole economy are now shown on the left side. On the right side, instead of 'sales to consumers', the appropriate entry is 'household final consumption expenditure' (including the cost of domestic services and the expenses of non-profit organisations).

A3.9    With these changes, and some renaming, the consolidated production account for enterprises can be presented as a consolidated production account for the whole economy:

Table A3.5 Consolidated production account for the whole economy
 $m $m
Wages and salaries195Household final consumption expenditure181
Gross operating surplus55General government final consumption expenditure48
Taxes less subsidies on production and imports25Gross fixed capital formation by enterprises45
  Gross fixed capital formation by general government5
  Changes in inventories2
  Gross national expenditure281
  Exports of goods and services35
  less Imports of goods and services41
Gross domestic product275Gross domestic product275

A3.10    The derivation of many of the items in this account is obvious as they are simply carried down from one of the two preceding production accounts. However, the derivation of some aggregates is more complicated. Such cases are elaborated

Table A3.6 Consolidated production account for the whole economy
Wages and salaries ($195m) =Enterprises ($150m) + General government ($40m) + Persons and NPISH ($5m)
Gross operating surplus ($55m) =Enterprises ($50m) + General government consumption of fixed capital ($5m)
Household final consumption expenditure ($181m) =Enterprises sales ($174m) + General government sales ($2m) + Persons and NPISH ($5m)

A3.11    In effect, this account is the same as the gross domestic product measured by the income and expenditure approaches shown in the Australian national accounts. It should be noted, however, that the changes in the value of inventories as calculated from existing business accounting records do not fulfil the requirements of national accounting. For national accounting purposes, physical changes in inventories should be valued at the prices current at the time the changes occur. Where the value so derived differs from that obtained from business accounting records, an 'inventory valuation adjustment' equal to the difference between the change in ‘book’ value of inventories and the value of physical changes at current prices should be applied. This adjustment has to be deducted from gross operating surplus, and, consequently, from gross domestic product, if these are estimated, in the first instance, from sources consistent with 'book' values.

A3.12    In gross domestic product measured by income approach, the item above for wages and salaries is replaced by the term 'compensation of employees', which includes wages and salaries, employer contributions to superannuation and workers' compensation premiums. In addition, gross operating surplus for unincorporated trading enterprises is renamed 'gross mixed income', in recognition of the fact that the income accruing to the owners of unincorporated businesses includes a return to labour as well as a return to capital. Gross fixed capital formation is shown separately for private and public enterprises.

A3.13    In the above discussion, financial enterprises were treated in precisely the same way as trading enterprises, but it was mentioned that they present a special problem. Financial enterprises are businesses mainly engaged in financial transactions in the market consisting of borrowing and lending, providing insurance or providing financial auxiliary services. Their main source of income is either a margin between interest received and interest paid or a margin between insurance premiums and the related claims. Their payments for wages and salaries and other purchases typically exceed the small amounts they receive as separate charges for their services (e.g. charges by banks for keeping current accounts or clearing cheques). If these separate charges are treated as the only charges they make for their services, the production account would show a gross operating loss. Results comparable with those for other enterprises are obtained by acknowledging that certain receipts of financial enterprises include a service charge element, and by including this in the calculation of their gross operating surplus. In effect, but with some qualifications, the service charge element is estimated based on valuing the output of financial enterprises at cost plus a profit component. In the case of non-life and life insurance and superannuation, part of the premiums is treated as an insurance service charge (the service charge is also included in the purchases of the recipients of the services). In the case of other financial enterprises such as banks, credit unions and finance companies, the interest paid by borrowers can be regarded as comprising two components: a service charge and a 'pure' interest flow. Likewise, the interest paid to depositors can be viewed as a 'pure' interest flow from which a service charge has been deducted. The total imputed service charge is the sum of the imputed service charges for both borrowers and depositors.