Why capital is listed under liability of balance sheet?Capital means investment made by the owner of the company isn't it. In that aspect investment will come under asset only. Then why its shown...

Why capital is listed under liability of balance sheet?

Capital means investment made by the owner of the company isn't it. In that aspect investment will come under asset only. Then why its shown under liability of a balance sheet.

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

I believe that what is going on here is that the term capital is being used in a slightly different way than it is usually used in economics (like the way you use it in this question).

In the case of balance sheets, capital refers to debt obligations that firms have incurred in order to buy their capital goods.

So, in this case, capital is being used as another term for a loan, essentially.  It is a specific kind of a loan that is used for a specific purpose.  That purpose is to buy capital goods.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

All capital, that is the funds put in by the owners of a business or a firm appear on the liability side of a balance sheet. These funds may appear under different account heads such as owners funds, share capital, and  retained earnings. An a wider meaning of capital, which is generally used in some phrase like 'capital employed' refers to what ever is the value of the assets owned by the including its fixed assets and working capital. This capital employed appears on the assets side of the balance sheet, and its amount is exactly equal to its sources of funds included on the liability side. The sources of funds, in addition to owner's capital include loans taken for carrying out the business and any provision kept for expected expenses or losses, which have not been actually incurred till the date of balance sheet.

The confusion regarding owners funds being shown as liability will be automatically vanish if you treat a business as a en entity separate from its owners. A business requires fund for fixed assets and working capital. These funds come from two sources, the owners funds and borrowed funds. Both these are sources of funds that the business has received. Therefore both these are therefore coming under liability side, which is also descried as sources of funds.

If ever a business is closed down or sold to someone else at the book value of its assets, the money so obtained will be returned to the owners after meeting the loan liability. So in a way we can say that like loan the owner's fund are also liability for the business.

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Equity or capital: The equity accounts include all the claims the owners have against the company. The business owner has an investment and it may be the only investment in the firm. If the firm has taken on other investment, that is considered here as well.

This the the investment by business owner not by the business.

zsxdcrftgyhbnujmxsdcfvgbhnjm's profile pic

zsxdcrftgyhbnujmxsdcfvgbhnjm | Student, Undergraduate | (Level 1) eNoter

Posted on

Capital is just liability to the owner of the business, that is to say, it is what the business owes the owner.

Remember that the owner and the business are two separates entities.

In general, when you are given something, what you are given becomes an asset, and the act of giving creates a liability to the giver.

Likewise, when a business owner injects capital into his business by putting money in its bank, that money becomes an asset for the business, and the act of giving creates a liability to the owner.

The asset is money in the bank. The liability is debt to the owner for giving it. The Bank account records the money in the bank. The Capital account records the debt to the owner.

 

anandiyengar's profile pic

anandiyengar | Student, College Freshman | eNotes Newbie

Posted on

It is assumed that every business that is established is growth oriented and growth is foeither profit based or on a no profit no loss basis. To acheive these ends, capital needs to be infused into the business by the promoter/s. Irrespective of the number of promoters, the possibility that the business runs in loss or is sold to another company needs to be taken into account when the balance sheet is prepared. This is so because a balance sheet has to account for all events in business. Balance sheet is prepared based on transactions and transactions can take place only between two entities. For this purpose, promoter/s are considered as entity/ies separate from business. Having shown business as a separate entity in the balance sheet, should a promoter choose to retire/withdraw from business, investment made by the promoter becomes a liability for business. Since the balance sheet is prepared for the business and not the promoter, capital is shown under liabilities although it is an investment made by the promoter.

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