Balance of Payment is a statement of all transactions between entities in one country and the outside world over a specified time period, such as a quarter or a year. It lists all interactions between residents of one country and residents of other countries that involve businesses, organizations, or governments. Balance of Payments includes all the economic transactions, which involve the transfer of holding or title of goods and services. It is also known as the Balance of International Payments. BoP can be classified as Current Account and Capital Account.
What is Current Account?
Current Account refers to the account, which records all the transactions that relate to the actual receipts and payments of visible items, invisible items, and unilateral transfers during a specific period of time. It is a statement that records the trade of goods & services and current transfers during a specific period. In simple words, the current account focuses on the transactions related to tangible items(goods), intangible items( services), and one-sided transfers(gifts and grants). Different components of the Current Account are Export and Import of Goods and Services, Unilateral or Unrequited Transfers to and from abroad, and Income receipts and payments to and from abroad.
What is Capital Account?
Capital Account comprises all the transactions, which have a direct or indirect impact on the assets and liabilities of the country or government with regard to the outside world. Under this, transactions like loans and investments are recorded among a country and the outside world. Thus, it can be concluded that capital accounts cause potential claims. Different components of Capital Account are Borrowings and Lendings to and from abroad, Investments to and from abroad, and Changes in Foreign Exchange Reserves.
Difference between Current Account and Capital Account
| Basis | Current Account | Capital Account |
|---|---|---|
| Meaning | Current Account refers to the account, which records all the transactions that relate to the actual receipts and payments of visible items, invisible items, and unilateral transfers during a specific period of time. | Capital Account comprises of all the transactions, which have a direct or indirect impact on the assets and liabilities of the country or government with regard to the outside world. |
| Nature of Transactions | Under this account, those transactions are recorded, which do not have any impact on the assets or liabilities of a country with regard to the outside world. | Under this account, those transactions are recorded, which have an impact on the assets or liabilities of a country with regard to the outside world. |
| Influence | It affects the current level of the country’s income. | It affects the capital market of the country. |
| Concept | Current Account is a flow concept because it is measured over a period of time. | Capital Account is a stock concept because it is measured at a point of time. |
| Deals with | It deals with receipts and payments for non-capital goods | It deals with financial resources and their uses. |
| Deficit | Current Account Deficit means that the inflow of foreign currency on account of exports is less than the outflow of foreign currency on account of the import of goods and services. | Capital Account Deficit means that the inflow of foreign currency on account of foreign investment is less than the outflow of foreign currency on account of lending abroad. |
| Components/Formula | Current Account = Export and Imports of Visible and Invisible Items + Current Transfers. | Capital Account = Borrowings and Lendings to and from Abroad + Investments to and from Abroad + Change in Foreign Exchange Reserves. |
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