Current vs Capital account - can anyone make it simpler to understand

CFA Level I
#1

Current vs Capital account - can anyone make it simpler to understand? Thanks.

#2

Think of
CURRENT A/C as P&L A/C

CAPITAL A/C as B/S ASSET SIDE

FINANCIAL A/C as B/S LIABILITY SIDE

most of the items that fall into this a/c are included in capital and current a/c

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#3

Would you mind elaborating, please, on what you mean? I’m a CPA and a CFA charterholder, as well as the ex-Controller of one company and the former CFO of another, but I don’t understand your question. If you could share a direct quotation of the sentence(s) that gave rise to your query, I’ll be glad to try to help.

#4

I think OP is referring to national accounts, not financial statements accounts. Bad luck for OP for not indicating the subject classification :slightly_smiling_face:

However, for OP’s question:

Lets take some steps back. The balance of payments (BOP) formula is:

BOP = current account + capital account + financial account + balancing item = 0

where:

Current Account = Exports - Imports + Net income from investments abroad + Net Transfer Payments

Capital Account = Exports - Imports + Investments + Loans + Other Economic Transactions

In the BOP formula, “financial account” is usually very tiny and most of the time inside the “Capital Account”, so we assume it as immaterial.

As BOP must be ZERO, Current Account equals Capital Account. Each one is measured in different terms, but with the same monetary value, so they cancel each other.

For the exam, the important thing to know is the relation of both, they are inversely related, if one is positive, the other must be negative. For example, the US is known for being a country that imports goods and services much more than it exports goods and services (is a net importer), so the Current Account is NEGATIVE. That means that the US has a POSITIVE Capital Account which means there is a positive net outflow of capital to abroad countries.

Now that we see this in simple terms, it has a lot of logic and is straightforward: if in net amounts, the US buys goods from abroad, money goes out of the country to foreign lands.

Hope this helps.

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#5

Thanks. this is one step to simplicity.

#6

Patent fees and legal services are recorded in which of the following balance of payments components?

  1. Capital account.
  2. Current account.
  3. Financial account.

The answer is Current account.

However, patent acquisition cost comes under capital account. For me either patent fees should also go under capital, since it is intangible asset or to the financial account.

#7

This is helpful and broadly makes sense too, problem is when they ask you about very specific transactions. I think its not explained very well in CFA curriculum for a beginner.