Differences Between Current Account and Capital Account

If you want to understand the detailed account of the balance of payments, you must understand this type of account.

Since no country alone is sufficient to provide for itself, most countries import goods from other countries to meet the needs of the countrymen and women. The balance of paymentsBalance Of PaymentsThe formula for Balance of Payment is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to the recording of all payments and obligations pertaining to imports from foreign countries vis-à-vis all payments and obligations pertaining to exports to foreign countries. It is the accounting of all the financial inflows and outflows of a nation.read more means the balance between exports and imports of a country. If a country exports more than it imports, it would be a balance of payment surplus. On the other hand, if a country imports more than it exports, it would be a balance of payment deficit.

We briefly talked about the balance of payments because without that. It would be impossible to understand current and capital accountCapital AccountThe capital account refers to the general ledger that records the transactions related to owners funds, i.e. their contributions earnings earned by the business till date after reduction of any distributions such as dividends. It is reported in the balance sheet under the equity side as “shareholders’ equity.”read more. because they are the two crucial key elements of the balance of payments other than financial accounts.

  • The current account records all the trading-related fund inflows and outflows. It includes trading of services, goods, products, miscellaneous expenses, and other incomes.On the other hand, the capital account is much bigger than the current account because it deals with capital investments and expenditures. It also includes investments made by public and private companies.

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Current Account vs Capital Account Infographics

Key Differences

  • The current account is the sum-total of the net balance of exportNet Balance Of ExportNet exports of any country are measured by calculating the value of goods or services exported by the home country minus the value of the goods or services imported by the home country. It includes various goods and services exported and imported by the government, like machinery, cars, consumer goods.read more and import and the net income & direct transfer. On the other hand, the capital account is the sum-total of non-financial assets acquired/disposed of, insurance received from foreign insurance companies for catastrophic losses, and debt forgiveness.The current account is used for trade affairs. On the other hand, the capital account is used for miscellaneous affairs. That means a capital account is combined with either a current or financial account to be of any value.The current account is regularly used, and the amount is usually small to medium. On the other hand, the capital account is used very infrequently, and the amount of capital account is usually large but not very large.The current account deals with exports and imports of a country. Capital account deals with the assets, capital transfer of the country. That means the capital account is all about finding the sources of capital and creating the right application for the current account and financial account.

Comparative Table

Conclusion

Both are very complex aspects of the balance of payments. And understanding them totally in this short scope would be impossible. However, we highlighted the key areas of both so that you can get an overview of how they work.

Another component that we never talked about here is a financial account. It is a major component of the balance of payments, and the amount of transactions under a financial account is usually pretty large. It includes portfolio investmentPortfolio InvestmentPortfolio investments are investments made in a group of assets (equity, debt, mutual funds, derivatives or even bitcoins) instead of a single asset with the objective of earning returns that are proportional to the investor’s risk profile.read more, direct investment, reserve assets, etc. In short, a financial account deals with the claims of financial assets of foreign countries.

If you want to know the balance of payments in detail, you need to dig deeper into current account current accountCurrent AccountThe current account formula of the balance of payment measures the import and export of goods and services and is calculated as the sum of the trade balance, net income, and current transfers. Current account formula = (X-M) + NI + NTread more, capital account, financial account, and balance of tradesBalance Of TradesThe balance of trade (BOT) is the country’s exports minus its imports. BOT is one of the significant components for any current economic asset as it measures a country’s net income earned on global investments.read more.

This has been a guide to the Current Account vs. Capital Account. Here we discuss the top differences between them, infographics, and a comparison table. You may also have a look at the following articles for gaining further knowledge in Economics –

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