Every business acquires funds from internal as well as from external sources. According to the business entity concept, the amount borrowed from the external sources together with the internal sources like, capital invested by the proprietor, is termed as liability to the business. Business entity concept treats business and business owner separately. Capital of the owner is treated as liability to the business because the business has to repay the amount of capital to the owner, in case of closure of the business. As liability incurred is credited, in the same way, fresh capital introduced and net profit increases the owner’s capital, and so, capital is credited. On the other hand, if liability is paid, it reduces liability, and so, it is debited. Similarly, drawings from capital and net loss reduce the capital, and so, capital is debited. Thus the rules of debit and credit are same for both liability and capital.

Understanding Debit and Credit Rules for Liability and Capital
The rules of debit and credit in accounting are foundational principles that maintain the balance of financial statements. For liabilities and capital (or equity), the rules are similar due to their nature as sources of funds.
1. Nature of Liabilities and Capital
- Both liabilities and capital represent claims against the assets of a business.
- Liabilities are obligations to pay others, while capital reflects the owner's stake in the business.
2. Rules of Debit and Credit
- For Liabilities:
- Increase in Liabilities: Credited
- Decrease in Liabilities: Debited
- For Capital:
- Increase in Capital: Credited
- Decrease in Capital: Debited
3. Commonality in Treatment
- Both liabilities and capital increase the overall funding available to a business.
- When liabilities are incurred or capital is invested, the company’s resources grow, indicating a credit entry.
- Conversely, when liabilities are settled or capital is withdrawn, it reflects a decrease in resources, necessitating a debit entry.
4. Impact on Financial Statements
- The treatment of both categories ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
- This consistent application of debit and credit helps maintain clarity and accuracy in financial reporting.
In summary, the rules of debit and credit are the same for liabilities and capital because they share common characteristics as sources of funds, impacting the business's financial structure and health.