Is Capital a Liability?

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What is Capital?

The amount of money or money’s worth, say stock of goods or machinery etc. invested or introduced by the proprietor into the business at the time of the commencement of the business is called as capital.

Capital can also be defined as the excess of the total assets of a business over its total liabilities at any particular time in the case of an existing or running business.

Capital = Total Assets – Total Liabilities

Is Capital a Liability?

Capital in Balance Sheet

Capital in Balance Sheet

The business is regarded as a separate entity which is different from the proprietors of the business. Hence, in a broad sense, capital may be regarded as the liability of the business which it owes to the owner and the owner may be regarded as the special creditor of the business.

Per Rowland – “In one sense Capital itself may be regarded as a liability- the amount due from the business to its proprietor”.

It is for the same reason capital is presented on the liabilities side of the balance sheet. But, though capital is entered on the liabilities side of the balance sheet, it is distinct from liabilities. Like – Capital is contributed by the owner whereas liabilities are by outsiders, capital may or may not be repaid to the owner but liabilities must be repaid etc.

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