Sometimes referred to as a current account, the capital account is a device that allows for easy tracking of investments and loans in and out of a given country. As securities and loans are bought and sold, the balance of the capital account is impacted, making it necessary to update the current status of the value of the assets contained in the account.
In some instances, capital or current accounts also track the flow of other types of financial transactions as well. These may include tracking the purchase and sale of goods and services as they flow back and forth from one country to another. In the event of interest payments on various purchases such as bonds, capital accounts also may choose to include this type of data, assuming the interest is involved in an international transaction.
The employment of a capital account to monitor transactions can be helpful in several ways. First, the account can help to provide an accurate picture of capital inflow. An example of capital inflow would be a foreign investor choosing to acquire a domestic asset. This rate of inflow is considered to be an important economic indicator that can help in the process of assessing the overall financial health of a country. Second, a capital account is an excellent tool in the task of monitoring capital outflow.
Outflow is defined as domestic investors choosing to acquire foreign assets. This figure is important as it helps to demonstrate the current rate of balance between what is circulating in the country versus what is flowing out of the country in the way of assets. Last, the capital account may include such vital financial indicators like debt forgiveness, the transfer of ownership of fixed assets, and royalty payments. All these factors help to make a capital account an important device in getting a strong grasp on the true financial health of a nation.
