Capital Accounts
In international finance and macroeconomics, the capital account refers to the flow of internal investment transaction to an economy. It is basically one of two essential parts of the balance of payment, the other being cash flow. This includes foreign exchange trade, investment, trade in goods, money market and bank transfers. The flow of capital represents net inflows and net outflows and is usually calculated as a ratio of assets to liabilities, capital stock to gross equity, and net worth to assets. It can be measured on different bases, including current assets and current liabilities, both of which are part of capital accounts.
The net change in the capital account may be influenced by a number of factors, including interest rates, inflation, changes in public spending and alterations in accounting standards. Changes in the balance between inflows and outflows are caused by the overall balance of payment and can either be surplus or deficit. A surplus capital account is one in which there is a surplus amount of money in the economy from investment activities, while a deficit capital account shows a deficit amount of money in the economy, usually from the sale of assets. Most indicators of capital account condition are influenced by the overall performance of gross domestic product (GDP), employment growth and inflation.
Net inflow and outflow movements are measured by net trade and net transfer payments, with net trade being the sum of total payments including sales and receipts minus sales and receipts. Net inflow flows are positive when investment yields a profit, and outflow movements are negative when investment yields a loss. A capital account may also be measured on a basis that shows only the balance sheet at a particular time. This means the sum of all financial statements of a company, with all its financial balances shown as a result of transactions entered in the year.
Capital Accounts As an Owner’s Guide
In international finance, financial accounts are usually presented in two forms: one is the country-specific balance sheet, and the other is a per diem or net trade deficit. For countries outside the US, there are two types of financial accounts. One is the U.S. trade deficit, which represents the difference between the value of export revenues and the value of imports, while the second is the foreign currency trade deficit, which represents the difference between the value of export receipts and the value of imports.
Allocating current assets to current liabilities is usually done by owners using their equity and retained earnings method. However, some companies prefer to allocate current assets to long-term liabilities and short-term assets according to net worth. The owners may use the equity and retained earnings method if they have adequate resources to ensure the required levels of current income and current capital. Alternatively, companies may opt for net worth allocation through net worth management technique, where all current debts are replaced with assets using a specific proportion of net worth.
Changes in balance sheet procedures are based on the assumption that the owner regularly re-balances his/her accounts by buying or selling new items to offset previous-year balances, offsetting sales by reducing purchases and selling new items, or by repurchasing previously held securities and selling previously held securities not purchased due to obsolescence. In cases of large capital account, transactions are re-allocated from current account to surplus account to cover the cash inflows and outflows. When a company does not regularly make balance adjustments, it is called a captive.