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Capital Account

Any financial transaction within a country that isn’t exerting an active effect on its savings, production, or income

What is the Capital Account?

The capital account is used to account for and measure any financial transaction within a country that isn’t exerting an active effect on that country’s savings, production, or income. The capital account – along with the current and financial accounts – make up the country’s balance of payments, which, together, comprehensively record and account for every financial transaction that affects a country.

 

Capital Account

 

Further Analysis of the Capital Account

The Bureau of Economic Analysis (BEA) is tasked with measuring capital account transactions within the United States. The transactions not easy to measure, as there is no consistent proof of their existence in the regular accounting reports received by the BEA. It is because capital account transactions occur without any regularity and are generally large in size.

At times, they are included in the BEA’s regular reports. When they are, the BEA must then accurately account for the transactions within the capital account ledger. It is done so that the gross national product (GNP) and gross domestic product (GDP) reports are not affected by them.

As mentioned above, the capital account is one piece of the balance of payments system. Once a capital account transaction begins to generate any type of income, they must be moved to one of the other two pieces within the system. If the transactions generate income from the sale of goods or services, they are recorded in the current account. If they generate income from investments, they are moved to the financial account.

 

Capital Account Subaccounts

There are two primary subaccounts within the capital account:

 

1. Capital Transfer

In the capital transfer subaccount, there are three sections or delegations for transactions:

  • Forgiveness of debt – The only portion of debt listed is the principal and any interest payments that are overdue. Future interest payments are not included in the measurement.
  • Insured, catastrophic loss – Includes the infrequent, large insurance payments made by foreign insurance companies. It is the BEA’s responsibility to determine with each transaction if it is reasonable to be called a catastrophic loss.
  • The third piece of the capital transfer subaccount is highly specific and deals explicitly with the transfer of U.S. governmental assets within the Panama Canal Commission directly to the Panamanian Republic.

 

2. Acquisition/Disposal of Non-Produced, Non-Financial Assets

The second subaccount – acquisition/disposal of non-produced, non-financial assets – measures the buying and selling of both tangible and intangible assets.

Tangible assets include things such as rights to natural resources, which include the right to mine for minerals and precious metals or to drill for oil at offshore drilling sights.

Intangible assets are anything of value that can’t physically be handled, which include things such as intellectual property rights, trademarks, patents, and copyrights.

 

Capital Account Subaccounts

 

Importance of the Capital Account

The capital account is important in that it makes a record of transactions that aren’t currently generating an income. The primary difficulty with capital accounts, however, is that they’re not the most reliable way to obtain a fair value for each individual transaction, because many go unrecorded or become mixed up, especially once they move to other sections of the balance of payments system.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Consumer Surplus Formula
  • Fiscal Policy
  • Normal Goods
  • Scarcity

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!