What is a Capital Account Deficit?

A capital account deficit occurs when the equity in a business turns negative. This means that the total amount of liabilities exceeds the total amount of assets. In this situation, a business is theoretically bankrupt, so management should take corrective action to turn the capital account back to a positive balance, such as by increasing revenues, cutting expenses, and/or contributing more capital to the business.

A lender might set loan covenants so that a capital account deficit will allow it to immediately call a loan. This is another reason to guard against such a deficit.