Question

The capital account _________.

1) increases when the owner invests money in the business
2) decreases with increased revenue
3) increases with increased expenses
4) has a normal balance of a debit

Answer 1

The capital account increases when the owner invests money in the business, and it has a normal balance of a credit, not a debit. Revenue and expenses do not directly impact the capital account, as they are part of the income statement.

Step-by-step explanation:

The capital account is a component of a nation's balance of payments that records all transactions involving the transfer of capital, including foreign direct investment and portfolio investment. In response to the student's question:

• The capital account increases when the owner invests money in the business. This is considered an equity injection and would be recorded as a credit in the capital account, increasing the owner's equity.
• The capital account is not directly affected by increased revenue, as revenue is part of the income statement and reflects the company's operational performance.
• Increased expenses also do not impact the capital account directly, as these are recorded on the income statement, which ultimately affects the retained earnings portion of the owner's equity over time.
• The capital account typically has a normal balance of a credit, not a debit. This is because the capital account reflects the owner's equity in the business, and investments into the business increase equity which is represented by a credit balance.

Remember, while the capital account records owner investments and adjustments to the owner's equity, the current account details the inflow and outflow of goods and services. Financial flows such as the purchase of stocks and bonds by foreign investors are represented in the financial account.