' Capital is a liability for a business.' Explain this statement with the principal applied.?

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Answer

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).

Thank You.

Answer

Yes
it is true
as per business entity concept, capital given by owner is internal liability of business.

business is seperate from owner.

Answer

Thanks

Answer

Capital as a Liability for a Business

Capital is the amount of money invested by the owners or shareholders of a business to start or expand the business. It is an essential part of a business that provides the necessary financial resources to operate and grow. However, from an accounting perspective, capital is considered a liability for a business. The following are the reasons why capital is a liability for a business:

Principal Applied

Capital is not an income-generating asset: Unlike other assets such as inventory or equipment that generate income, capital is not an income-generating asset. Therefore, it is considered a liability because the business owners or shareholders expect a return on their investment.

Capital has a cost: The cost of capital is the rate of return that the business owners or shareholders expect. The business must pay this cost regardless of whether the business makes a profit or not. Therefore, capital is considered a liability because it represents an obligation that the business must fulfill.

Capital reduces the business's net income: When a business earns a profit, it must distribute a portion of that profit to the owners or shareholders as a return on their investment. This distribution reduces the business's net income and, as a result, reduces the value of the business. Therefore, capital is considered a liability because it represents an ongoing obligation to the owners or shareholders.

Capital has a term: Capital is typically invested for a specific period, and the owners or shareholders expect a return on their investment within that period. Therefore, capital is considered a liability because it represents an obligation that the business must fulfill within a specific time frame.

In conclusion, capital is a liability for a business because it represents an obligation that the business must fulfill to its owners or shareholders. Although capital is an essential part of a business, it is not an income-generating asset and has a cost that reduces the business's net income. Therefore, it is considered a liability from an accounting perspective.

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