Definitions

Capital account

Capital account

In financial accounting, the capital account is one of the accounts in shareholders' equity. Sole proprietorships have a single capital account in the owner's equity. Partnerships maintain a capital account for each of the partners.

In economics, the capital account is one of two primary components of the balance of payments, the other being the current account. The capital account is referred to as the financial account in the IMF's definition; the IMF has a different definition of the term capital account. (See balance of payments.)

begin{align} mbox{Capital account} & = mbox{Increase in foreign ownership of domestic assets} & - mbox{Increase of domestic ownership of foreign assets} & = mbox{Foreign direct investment} & + mbox{Portfolio investment} & + mbox{Other investment} end{align}

The capital account records all transactions between a domestic and foreign resident that involves a change of ownership of an asset. It is the net result of public and private international investment flowing in and out of a country. This includes foreign direct investment, portfolio investment (such as changes in holdings of stocks and bonds) and other investments (such as changes in holdings in loans, bank accounts, and currencies).

From a domestic point of view, a foreign investor acquiring a domestic asset is considered a capital inflow, while a domestic resident acquiring a foreign asset is considered a capital outflow.

Along with transactions pertaining to non-financial and non-produced assets, the capital account may also include debt forgiveness, the transfer of goods and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, patents, copyrights, royalties, and uninsured damage to fixed assets. (http://www.investopedia.com/articles/03/070203.asp).

Countries can impose capital controls to control the flows into and out of their capital accounts. Countries without capital controls are said to have full capital account convertibility.

See also

Net capital outflow

Capital Goods

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