Financial Account

What is a ' Financial Account'

A component of a country’s balance of payments that covers claims on or liabilities to non-residents, specifically in regard to financial assets. Financial account components include direct investment, portfolio investment and reserve assets, and are broken down by sector. When recorded in a country’s balance of payments, claims made by non-residents on the financial assets of residents are considered liabilities, while claims made against non-residents by residents are considered assets. The financial account differs from the capital account in that the capital account deals with transfers of capital assets. Additionally, the financial account can include claims on land.

BREAKING DOWN ' Financial Account'

The financial account involves financial assets, such as gold, currency, derivatives, special drawing rights, equity and bonds. During a complex transaction that contains both capital assets and financial claims, a country may record part of a transaction in its capital account and the other part in its current account. Additionally, because entries in the financial account are net entries that offset credits with debits, they may not appear in a country’s balance of payments, even if transactions are occurring between residents and non-residents.

Easing access to a country’s capital is considered part of a broader movement toward economic liberalization, with a more liberalized financial account providing the benefit of opening a country up to capital markets. Reducing restrictions to the financial account does have its risks. The more a country’s economy is integrated with other economies around the world, the higher the likelihood that economic troubles abroad may find their way back home. This potential outcome is weighed against the potential benefits: lower funding costs, access to global capital markets and increased efficiency.

RELATED TERMS
  1. Capital Account

    A national account that shows the net change in asset ownership ...
  2. Balance Of Payments (BOP)

    A record of all transactions made between one particular country ...
  3. Official Settlement Account

    A type of account used in balance of payments accounting to keep ...
  4. Chart Of Accounts

    A listing of each account a company owns, along with the account ...
  5. Double Entry

    The fundamental concept underlying present-day bookkeeping and ...
  6. Financial Asset

    An asset that derives value because of a contractual claim. Stocks, ...
Related Articles
  1. Markets

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments.
  2. Markets

    What Is The Balance Of Payments?

    The balance of payments helps countries to track how much money is coming in and how much money is going out. Learn more about BOPs here.
  3. Markets

    What is a Capital Account?

    Capital account is an economic term that refers to the net change in investment and asset ownership for a nation.
  4. Managing Wealth

    Explaining Financial Assets

    A financial asset is intangible property that represents a claim on ownership of an entity or contractual rights to future payments.
  5. Markets

    5 Economic Effects Of Country Liberalization

    Liberalization provides new opportunities for diversification and profit.
  6. Markets

    The Balance Of Payments

    The "Balance of Payments" is a record of all payments or monetary transactions between a particular country and other nations during a specific time period. It provides a useful glimpse into ...
  7. Trading

    Forex Tutorial: Economic Theories, Models, Feeds & Data

    There is a great deal of academic theory revolving around currencies. While often not applicable directly to day-to-day trading, it is helpful to understand the overarching ideas behind the ...
  8. Markets

    Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.
  9. Markets

    Current Account Deficit

    A current account deficit occurs when a country spends more money on the goods and services it imports than it receives for the goods and services it exports.
  10. Personal Finance

    What is an Account Balance?

    An account balance represents the total amount of money in a financial account at any given moment.
RELATED FAQS
  1. What is the difference between a financial account and a capital account?

    Understand the components of a country's balance of payments. Learn about the difference between a country's financial account ... Read Answer >>
  2. How does a capital account illustrate the strength of investment markets for a country?

    Understand what a country's capital account is and how the capital account level can be used to gauge the strength of investment ... Read Answer >>
  3. What transactions are included in a country's balance of payments?

    Learn about the many types of transactions that are recorded in a country's balance of payments, including the current, capital ... Read Answer >>
  4. What does a positive capital account balance mean?

    Learn about a capital account, the four categories of transactions that comprise it and the meaning of a positive capital ... Read Answer >>
  5. What does it mean when a country has little activity in its capital account?

    Know what a country's capital account represents and understand what the implications are if a country has little activity ... Read Answer >>
  6. How does a nation's balance of payments affect its capital stock?

    Find out how changes in a country's balance of payments can reflect changes in the capital stock of that nation's businesses ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center