Capital account:

The capital account records all  international transactions  that involve  a resident of the country concerned changing either his assets  with  or  his liabilities  to a resident of another country. As we noted earlier, transactions  in the capital account reflect a change in a stock - either assets or liabilities.

It is often useful  to make distinctions  between various forms  of  capital account transactions. The  basic  distinctions are  between private  and  official transactions, between portfolio and direct investment, and by the term of the investment  (i.e. short or long term).

Direct investment  is the act of purchasing an asset and at  the  same  time acquiring control of  it (other  than the ability  to re-sell it). Portfolio investment by  contrast is the acquisition of an asset that does not give the purchaser control. An obvious example  is  the purchase of shares in a foreign company or of bonds  issued by  a  foreign government. Loans made  to foreign firms  or
governments  come into the same  broad category. Such portfolio investment  is often also distinguished by the period of the loan (short, medium or long are conventional distinctions, although  in many cases only the short and  long categories are used).  The  distinction between short-term and  long-term investment is often confusing, but  usually relates to the specification of the asset rather than to the length of time for which it is held.

The purchase of an asset in another country, whether it is direct or portfolio investment, would appear as a negative item  in the capital account  for  the purchasing firm's country, and as a positive item in the capital account for the other country. That capital outflows appear as a negative item in a country's balance of payments, and capital  inflows as positive  items, often causes conhsion. One  way of avoiding this is to consider the direction in which the payment would go (if made directly). The purchase of a foreign asset would then involve the  transfer of money to the foreign  country,  as  would  the purchase of an (imported) good, and so must appear as a negative item in the balance of payments of the purchaser's country (and as a positive item in the accounts of  the seller's country).