Differences Between Current Account and Capital Account
Current account is the financial account of the economy or any individual entity which shows results of various revenue income and expenditure and calculates revenue profits while capital account indicates various capital income and expenditure like purchase and sale of fixed asset, capital repairs, sale of investments etc
If you want to understand the detailed account of the balance of payments, it is important that you understand both this type of account.
Since no country alone is sufficient to provide for itself, most countries in the world import goods from other countries to meet the need 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. means the balance between exports and imports of a country. If a country exports more than it imports, then 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 talked about the balance of payment in brief 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.”. Because they are the two crucial key elements of the balance of payments other than financial accounts.
- Current account records all the trading related fund inflows and outflows. It includes trading of services, goods, products, miscellaneous expenses, and other incomes as well.
- The capital account, on the other hand, is much bigger than the current account; because it deals with capital investments and expenditures and it also includes investments made by public and private companies.
Current Account vs Capital Account Infographics
- 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. and import and the net income & direct transfer. The capital account, on the other hand, is the sum-total of non-financial assets acquired/disposed of, insurance received from foreign insurance companies for catastrophic losses, and debt forgiveness.
- Current account is used for trade affairs. The capital account, on the other hand, is used for miscellaneous affairs. That means capital account gets combined with either current account or financial account to be of any value.
- Current account is used pretty regularly and the amount is usually small to medium. The capital account, on the other hand, is used very infrequently and the amount of capital account is usually large but not very large.
- 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.
|Basis for Comparison||Current Account||Capital Account|
|1. Meaning||It is the representation of the trade balance of the country and also of the direct payments and net income.||It is the representation of capital investments and expenditures that don’t affect the trade of the country.|
|2. Measures||The fund inflow and outflow of international trades.||The capital is invested and expended in making international trade happen.|
|3. Affect changes in||It affects the net income of the country.||It affects the current account or the financial account (either to reduce trade deficitTrade DeficitWhen the total sum of goods or services that a country imports from other countries is higher than the total sum of goods or services that a country exports to other countries, this is referred to as a trade deficit, which is the opposite of the balance of trade theory. or to increase trade surplus).|
|4. Deals with||International tradeInternational TradeThe trading or exchange of products and/or services across international borders is referred to as international trade. It frequently includes other risk factors such as exchange rate, government policies, economy, laws of the other nation, judicial system, and financial markets that impact trade between the two., receipt of cash non-capital items, etc.||The application of the capital and how they are sourced.|
|5. Balance of payment||The current account is one component of the balance of payment.||The capital account is also another component that constitutes the balance of payment.|
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. In short, financial account deals with the claims of financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash. of foreign countries. 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., direct investment, reserve assets, etc. It is a major component of the balance of payments and the amount of transaction under a financial account is usually pretty large.
If you want to know the balance of payments in detail, you need to dig deeper into the concepts like 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 + NT, 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..
This has been a guide to the Current Account vs Capital Account. Here we discuss the top differences between them. along with infographics and comparison table. You may also have a look at the following articles for gaining further knowledge in Economics –