The current account records exports and imports of goods and services as well as unilateral transfers whereas the capital account records transactions of purchase and sale of foreign assets and liabilities during a particular year. The current account considers goods and services currently being produced. The credit and debit of foreign exchange due to these transactions are also recorded in the balance of current account. The capital account is concerned with payments of debts and claims, regardless of the time period. The balance of capital account includes all items reflecting changes in stocks.

The balance of payments contains two accounts: current and capital. The current account deals with short-term transactions known as actual transactions, as they have a real impact on income, output and employment levels of a country through the movement of goods and services in the economy. It is comprised of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers, and investment income (income from factors such as land or foreign shares). The resulting balance of the current account is approximated as the sum total of balance of trade.

The capital account is a record of the inflows and outflows of capital that directly affect a country’s foreign assets and liabilities. It is concerned with all international trade transactions between citizens of a given country and citizens in other countries. The components of the capital account include foreign investment and loans, banking capital and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.

In economic terms, the current account deals with receipt and payment in cash as well as non-capital items, and the capital account reflects sources and utilization of capital. The sum of the current account and capital account as reflected in the balance of payments will always be zero; any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account.

Let's go deeper - Read Breaking Down the Balance of Trade and Exploring the Current Account in the Balance of Payment.

  1. What does a negative balance in the capital account mean?

    Understand what a country's capital account represents and the significance of a negative, or deficit, balance in the capital ... Read Answer >>
  2. 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 >>
  3. How does the balance of trade impact a nation's capital accounts balance?

    Find out how a country's capital account is related to the current account, the financial account, and the overall balance ... Read Answer >>
  4. How does comparative advantage influence the balance of payments?

    Learn how comparative advantage affects a country's balance of exports and imports, which in turn influences the overall ... Read Answer >>
  5. At what level is the current account deficit considered excessive, in terms of percent?

    Take a deeper look at the variables that impact current account deficits, and learn why not all types of deficits have equal ... Read Answer >>
Related Articles
  1. Insights

    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.
  2. Insights

    Exploring the Current Account in the Balance of Payments

    Learn how a country's current account balance reflects the country's economic health.
  3. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  4. Personal Finance

    Handling High-Yield Savings Accounts

    Is this the savings route for you? Read on to find out what these accounts have to offer.
  5. Insights

    Why Deficits Are Flawed Measures of Unfair Trade

    Trump’s obsession with erasing the $500B U.S. trade deficit is flawed economics, experts say.
  6. Investing

    What's a Trial Balance?

    A trial balance is a worksheet listing the debit or credit balances of all the ledger accounts for an entity. Under accounting theory, the total of all the debits must equal the total of all ...
  1. Financial Account

    The financial account is a component of a country’s balance of ...
  2. Balance of Payments (BOP)

    The balance of payments is a statement of all transactions made ...
  3. Account Balance

    1. The amount of money in a financial repository, such as a checking ...
  4. Accounting

    The systematic and comprehensive recording of financial transactions ...
  5. Chart of Accounts

    A chart of accounts is a list of each account a company owns, ...
  6. Trade Deficit

    A trade deficit occurs a country's imports exceeds its exports. ...
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center