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" capital is a liability for the business" explain this statement with the principal applied

Posted by Tanya Tiwari 4 years, 2 months ago

CBSE > Class 11 > Accountancy

2 answers

Adarsh Yagyasaini 4 years, 2 months ago

Principle of business entity

Yogita Ingle 4 years, 2 months ago

In the above statement it is the Principle of Business Entity which is implied. As per this principle, business is treated as distinct and a separate entity from its owners. In simple words, we can say that business and its owners are different. In fact, the business (firm) borrows money from the owners (which is regarded as capital) and in return, the business pays interest on this money so borrowed from the owner. Thus, in this manner, the capital invested is a liability for a business. Hence, in accounting sense, it means one separate entity (owner) is assumed to be giving money to another distinct entity (business unit).

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