A capital account deficit in accounting refers to a situation where a business's equity turns negative, indicating that its liabilities surpass its assets. This condition implies potential insolvency, urging management to rectify the deficit by boosting revenues, cutting expenses, or injecting more capital into the business.
A capital account deficit arises when a company's equity turns negative, indicating that liabilities surpass assets. This condition suggests theoretical bankruptcy, prompting urgent corrective measures by management to restore positive equity. Strategies may include boosting revenues, reducing expenses, or injecting additional capital into the business.
Additionally, lenders might include specific covenants in loan agreements that allow them to demand immediate repayment if a capital account deficit occurs, further emphasizing the importance of maintaining a positive capital account balance.
An example of a capital account deficit is when a business has total assets valued at $50,000 and total liabilities of $65,000, resulting in a deficit of $15,000.
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