Current Account

(noun)

In economics, the current account is one of the two primary components of the balance of payments (the other being the capital account). It is the sum of the balance of trade (i.e., net revenue on exports minus payments for imports), times income (earnings on foreign investments minus payments made to foreign investors), and cash transfers.

Related Terms

Examples of Current Account in the following topics:

  • The Current Account

    • The current account represents the sum of net exports, factor income, and cash transfers.
    • Because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.
    • Normally, the current account is calculated by adding up the 4 components of current account: goods, services, income and cash transfers.
    • Thus, a country's current account can by calculated by the following formula:
    • When the sum of these four components is positive, the current account has a surplus.

  • Reporting Current Liabilities

    • Current liabilities are typically due and paid for during the current accounting period or within a one year period.
    • For many companies, accounts payable is the first balance sheet account listed in the current liabilities section.
    • For example, accounts payable for goods, services, or supplies that were purchased with credit and for use in the operation of the business and payable within a one-year period would be current liabilities.
    • Accounts payable are typically due within 30 days.
    • In addition to current liabilities, long-term liabilities are listed in a separate section after current debt.

  • What Goes on the Balances Sheet and What Goes in the Notes

    • The balance sheet lists current liability accounts and their balances; the notes provide explanations for the balances, which are sometimes required.
    • All liabilities are typically placed on the same side of the report page as the owner's equity because both those accounts have credit balances (asset accounts, on the other hand, have debit balances).
    • Current liabilities and their account balances as of the date on the balance sheet are presented first, in order by due date.
    • The balances in these accounts are typically due in the current accounting period or within one year.
    • Current liability information found in the notes to the financial statements provide additional explanation on the liability balances and any circumstances affecting them.

  • Types of Receivables

    • Receivables can be classified as accounts receivables, notes receivable and other receivables ( loans, settlement amounts due for non-current asset sales, rent receivable, term deposits).
    • Other receivables can be divided according to whether they are expected to be received within the current accounting period or 12 months (current receivables), or received greater than 12 months ( non-current receivables).
    • Accounts receivable are amounts that customers owe the company for normal credit purchases .
    • Since accounts receivable are generally collected within two months of the sale, they are considered a current asset.
    • For example, interest revenue from notes or other interest-bearing assets is accrued at the end of each accounting period and placed in an account named interest receivable.

  • Calculating Expected Value

    • The main accounts which affect the value of working capital are accounts receivable, inventory, and accounts payable.
    • Net working capital is calculated as current assets minus current liabilities.
    • Current assets and current liabilities include three accounts which are of special importance.
    • As an example, imagine a company has accounts receivable of $10,000, current inventory that has a value of $5,000, and accounts payable of $7,000.
    • Working capital is equal to accounts receivable, plus current inventory, minus accounts payable.

  • Defining Current Liabilities

    • They are an important part of the basic accounting equation -- assets = liabilities + owner's equity.
    • Another important point is that current liabilities are many times not "current" and are actually past due.
    • For example, accounts payable are due within 30 days and are typically paid within 30 days.
    • So, the accounts payable balance reported on the balance sheet under "current" liabilities may include amounts that are over 30 days due.
    • Current liabilities are debt owed and payable no later than the current accounting period.

  • Current Maturities of Long-Term Debt

    • The portion of long-term liabilities that must be paid in the coming 12-month period are classified as current liabilities.
    • The portion of the liability considered "current" is moved from the long-term liabilities section to the current liabilities section.
    • For example, a loan for which two payments of USD 1,000 are due--one in the next 12 months and the other after that date--would be split into one USD 1000 portion of the debt classified as a current liability, and the other USD 1000 as a long-term liability (note this example does not take into account any interest or discounting effects, which may be required depending on the accounting rules that may apply).
    • If the current liability section already has an accounts payable account (balance which is usually paid off in 30 days), the current portion of the loan payable (due within 12 months) would be listed after accounts payable.
    • Explain the reporting of the current portion of a long-term debt

  • Tax Accounting

    • Tax accounting couples legal obligations with financial accounting to ensure adherence to current tax laws.
    • In short, every region has specific tax accounting rules and regulations.
    • Tax accountants act as the bridge between an organization's accounting team and the reporting bodies in the region.
    • As a result, the primary role of a tax accountant is to understand the business' current operating status, distill profitability before tax, and report earnings.
    • This image demonstrates the various responsibilities and perspectives of different forms of accounting (those being tax accounting, managerial accounting and financial accounting).

  • Basic types of accounts

    • Asset accounts: represent the different types of economic resources owned by a business, common examples of asset accounts are cash, cash in bank, equipment, building, inventory, prepaid rent, goodwill, accounts receivable.Assets are usually broken down into three categories: Current assets, fixed assets, and intangible assets.
    • Current assets are assets which could be converted to cash fairly quickly if necessary, certainly in less than a year.Examples of current assets include cash, cash in bank, inventory, prepaid rent, and accounts receivable.Fixed assets are assets of a more permanent nature like manufacturing equipment, buildings owned, and the like.Intangible assets, like goodwill, are monetary values assigned to intangibles like a brand name.It is typically used when accountants need to justify the purchase price of one company by another when the price cannot be justified by the monetary value of the purchased company's assets minus liabilities.Intangible assets are beyond the scope of this chapter as they apply more to larger corporations than to a start-up business.
    • Liability accounts: represent the different types of economic obligations by a business, such as accounts payable, bank loan, bonds payable, accrued interest.Current liabilities are liabilities which are scheduled to be paid within a short period of time, usually less than a year.Examples of current liabilities include accounts payable to creditors, like suppliers, current amounts payable to employees (payroll) and interest due on short term loans.Long-term liabilities (sometimes called fixed liabilities) are liabilities of a more permanent nature like loans that are not due in the current year (long-term debt), and the like.
    • Typically, accounts in a chart of accounts each have an account number.
    • In the same way, an account number in a chart of accounts uniquely identifies an account and is easier to use in a computerized general accounting system.

  • Current Ratio

    • It compares a firm's current assets to its current liabilities.
    • The current ratio is calculated by taking total current assets and dividing by total current liabilities.
    • If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities).
    • A high current ratio can be a sign of problems in managing working capital (what is leftover of current assets after deducting current liabilities).
    • For example, when inventory turns over more rapidly than accounts payable becomes due, the current ratio will be less than one.