Current vs. Capital Account

How Do Current and Capital Accounts Differ? An overview of current vs. capital accounts:

A country's balance of payments is divided into two, by its current and capital accounts. The capital account documents the net change in assets and liabilities over the course of a given year, whereas the current account shows a country's net revenue over time.

 

The capital account reflects the sources and use of capital, while the current account deals with the receipt and payment of cash as well as non-capital goods. The balance of payments will always show a zero current account and capital account total. Any current account surplus or deficit is equaled and cancelled out by a corresponding surplus or deficit in the capital account.

 

•    Two parts of a country's balance of payments are the current and capital accounts.

 

•    The current account is the discrepancy between a nation's investments and savings.

 

•    The net change in assets and liabilities over time is shown in a country's capital account.

 

A country's short-term transactions or the difference between its savings and investments are dealt with by the current account. Since they actually affect income, output, and employment levels through the flow of goods and services through the economy, these are also known as actual transactions. The current account is made up of bilateral transfers, investment income, visible commerce (export and import of products), and invisible trade (export and import of services) (income from factors such as land or foreign shares). 

 

The balance of the current account also reflects the credit and debit of foreign exchange resulting from these transactions. The balance of trade is used as a rough approximation for the current account balance. The following methods that transactions are recorded in the current account:

 

•    Exports are recognized in the balance of payments as credits.

 

•    Imports are shown in the balance of payments as debits.

 

The current account provides economists and other observers with a snapshot of the nation's economic health. The trade balance, which is the difference between exports and imports, determines whether a country's current balance is positive or negative. When the current account is positive, the surplus makes the nation a "net lender" to the rest of the globe. 

 

A deficit indicates a negative current account balance. In this instance, that nation is regarded as a net borrower. During a recession, if imports fall and exports rise to stronger economies, the country's current account deficit decreases. However, if the economy expands and exports stagnate while imports increase, the current account imbalance expands.

 

A country's foreign assets and liabilities are directly impacted by the capital inflows and outflows that are recorded in the capital account. All cross-border trade between nationals of one country and those of other nations is addressed.

 

Foreign investment and loans, banking, and other sources of capital, as well as monetary changes or adjustments to the foreign exchange reserve, are all included as parts of the capital account. Factors like commercial borrowings, banking, investments, loans, and capital are reflected in the capital account flow. 

 

A positive balance on the capital account implies that money is coming into the nation, while a negative balance shows that it is leaving. In this situation, the nation might be accumulating more foreign assets.

 

In other words, regardless of the time period, the capital account is concerned with making payments on debts and claims. All items indicating stock changes are likewise included in the capital account balance.

 

Note: The capital account is divided into two groups by the International Monetary Fund- the financial account and the capital account.

 

In accounting, the term capital account is also used. It is a general ledger account that is used to record the contributed capital and retained earnings of corporate owners. These balances are shown in the shareholder equity part of a balance sheet.