What is a Capital Account

The capital account, in international economics, is the part of the balance of payments which records all transactions made between entities in one country with entities in the rest of the world. These transactions consist of imports and exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances. The balance of payments is composed of a capital account and a current account — though a narrower definition breaks down the capital account into a financial account and a capital account. In accounting, the capital account shows the net worth of a business at a specific point in time – and is otherwise known as shareholders' equity.


Capital Account

BREAKING DOWN Capital Account

Changes in the balance of payments can provide a lot of clues about a country’s relative level of economic health and future stability. The capital account indicates whether a country is importing or exporting capital. Big changes in the capital account can indicate of how attractive a country is to foreign investors and can have a big impact on exchange rates.

Because all the transactions recorded in the balance of payments sum to zero, countries which run large trade deficits (current account deficits), like the United States, must by definition also run large capital account surpluses - which means more capital is flowing in than is going out, and increasing foreign ownership of its assets. A country with a large trade surplus is exporting capital, and running a capital account deficit – which means money is flowing out of the country.

It is important to remember that the U.S. trade deficit is the consequence of foreign investors finding U.S. assets particularly attractive, and driving up the value of the dollar. Should America's relative appeal to foreign investors fade, the dollar would weaken and the trade deficit would shrink.

Capital Account Is Referred to as the Financial Account By The IMF

In recent years, many countries have adopted the narrower meaning of capital account used by the International Monetary Fund (IMF). It splits the capital account into two top-level divisions: the financial account and capital account. The capital and financial accounts measure net flows of financial claims, i.e., changes in asset position.

An economy's stock of foreign assets versus foreign liabilities is referred to as its net international investment position, or simply net foreign assets, which measures a country's net claims on the rest of the world. If a country’s claims on the rest of the world exceed their claims on it, then it has positive net foreign assets and is said to be a net creditor. If negative, a net debtor. The position changes over time as indicated by the capital and financial account.

The financial account measures increases or decreases in international ownership of assets, whether they be individuals, businesses, governments or central banks. These assets include foreign direct investments, securities like stocks and bonds and gold and foreign exchange reserves. The capital account, under this definition, measures financial transactions that do not affect income, production or savings, such as international transfers of drilling rights, trademarks and copyrights.

For more on the capital and financial accounts in the balance of payments, read Understanding Capital and Financial Accounts in the Balance of Payments.

Corporate Capital Accounts

In accounting, a capital account is a general ledger account that is used to record the owners' contributed capital and retained earnings - the cumulative amount of a company's earnings since it was formed, minus the cumulative dividends paid to the shareholders. Paid in capital include the common stock and additional paid-in capital accounts. The balances of the capital accounts are reported in the shareholder's equity section of the balance sheet. The treasury stock account, is a contra account within shareholders' equity, which reports share buybacks.