What is a Capital Account?

Published by Thomas Herold in Accounting, Corporate Finance, Investments

'Capital Account' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Capital Account demonstrates the net changes in the financial asset ownership for any country. When added in with the national current account, this makes up the given country’s balance of payments. This capital account will always include such things as portfolio investment and FDI foreign direct investment as well as any changes in the reserve account. It is also possible for the capital account to refer to any account which displays a company’s net worth at a particular moment and snapshot in time.

On a macro-economic scale, what the capital account actually figures up is the total economic production for a region or entire nation. With corporations it is different. Here the capital account is actually a general ledger account that the firm will utilize to record the sums of money which any investor provides the company with in exchange for a stake. It also shows the accumulative amount of the earnings of the firm less the accumulative distributions to the various stakeholders in the firm. These balances become reportable in the owner’s equity section, the stockholder’s equity section, or the partner’s equity section on balance sheets.

Where nations are concerned, the capital accounts total up all of the economic affairs of the nation as a whole. Markets are particularly concerned with this figure as it reveals the total picture and general direction of the nation economically. It also delivers a range of sell and buy signals for a number of different portfolio strategies and particular industries.

The balance of trade for a nation is a component of the national balance of payments. Take the United States as an example. The balance of payments within the U.S. is comprised of three subaccounts. These are the capital account, the current account, and the financial account. Each of these possesses its own special outflows and inflows.

Analysts and economists like to use the balance of trade. It helps them to more effectively grasp the national economic strength as measured against other competing nations. Take another example. Nations that possess huge trade deficits like the United States and Great Britain will generally borrow money in order to purchase foreign-produced goods and services. Those countries like Germany with enormous trade surpluses usually engage in the opposite activity. Such a balance of trade often corresponds to the political situation in a nation as it reveals how much foreign investment occurs in the receiving nation.

With corporations, it is once again different. They will have a great number of capital accounts. Those capital accounts which are for paid-in capital include preferred stock, common stock, and paid-in capital that stands in excess of par. These sums report in the money which the firm receives in as they float their share of capital stock to various investors. Retained earnings represent the accumulative earnings less accumulative dividends which they have paid out to stake holders. The account for treasury stock reports the sum of money the firm pays out to buy back shares of its stock (which are not retired).

Where sole proprietorships are concerned, there will be a capital account that shows the initial investment of the owner. This will grow every year by the amount of the annual earnings less the yearly withdrawals. There will also be a drawing account, many times referred to as a contra account. Its debit balance will equate to the amount of assets of the firm that the owner draws down in a given accounting year for his or her personal use. When the conclusion of the accounting year arrives, this drawing account becomes closed through transferring over any debit balance to the company capital account. It is a requirement that the balances in the various capital accounts have to equal the as-reported sum of all assets less liabilities of the firm.

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The term 'Capital Account' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.