Current Account vs Capital Account

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.read more 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.”read more. 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

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Current Account vs Capital Account Infographics

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Key Differences

Comparative Table

Basis for ComparisonCurrent AccountCapital Account
1. MeaningIt 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 inIt 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.read more 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.read more, receipt of cash non-capital items, etc.The application of the capital and how they are sourced.
5. Balance of paymentThe current account is one component of the balance of payment.The capital account is also another component that constitutes the balance of payment.

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. 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.read more 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.read more, 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 account, 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.

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