What is a 'Capital Account'
A capital account shows the net change in physical or financial asset ownership for a nation and, together with the current account, constitutes a nation's balance of payments. The capital account includes foreign direct investment (FDI), portfolio and other investments, plus changes in the reserve account. A capital account may also refer to an account showing the net worth of a business at a specific point in time.
BREAKING DOWN 'Capital Account'
A nation’s capital account calculates the economic activity of a country or region. A corporation’s capital account is a general ledger account used for recording the amounts an investor pays to the company and the cumulative amount of the company’s earnings minus cumulative distributions to the owners. Capital accounts’ balances are reported in the owners’ equity, partners’ equity or stockholders’ equity section of the balance sheet.
National Capital Accounts
A nation’s capital account summarizes the country’s overall economic status. The markets closely monitor the capital account because it shows the overall direction of the country’s economy and provides buy and sell signals for various industries or portfolio strategies.
A country’s balance of trade is part of its balance of payments. For example, the balance of payments in the United States is composed of three subaccounts: the current account, the capital account and the financial account. Each has its own types of inflows and outflows.
Economists and analysts utilize the balance of trade in understanding the strength of a country’s economy in comparison to other countries. For example, a country with a large trade deficit is typically borrowing money for purchasing goods and services, whereas a country with a large trade surplus is typically doing the opposite. The balance of trade may correlate with the country’s political stability because it is indicative of the level of foreign investment taking place there.
Corporate Capital Accounts
A corporation holds multiple capital accounts. Paid-in capital accounts such as common stock, preferred stock or paid-in capital in excess of par report the amounts the corporation receives when shares of capital stock are issued to investors. Retained earnings accounts contain the corporation’s cumulative earnings since formation minus cumulative dividends distributed to stockholders. The treasury stock account reports the amount the corporation pays to repurchase its own shares of stock that are not retired.
In a sole proprietorship, one capital account begins with the owner’s original investment and increases for each year’s earnings minus each year’s withdrawals. The drawing account, which is a contra account, has a debit balance equal to the amount of business assets the owner withdraws during the current accounting year for personal use. At each accounting year’s end, the drawing account is closed by transferring its debit balance to the capital account. The total of the balances in the capital accounts must equal the reported total of the company’s assets minus its liabilities.