The simple definition of capital is that capital is the owners claim in the business. We usually expect that since capital is money that we input to start a business the same should be viewed as an asset. But that not the case in accounting, while recording the different type of capital in an organization, the capital are located on the credit side and they are categorized as a special liability.
Reasons to know why Business Capital is a Liability
Capital and the business entity are two different things
The business entity and business capital are two different things in business. Though capital is just the money that the owner –business entity invest with the aim of profit. The owner expects capital here to earn a viable return and return the invested money plus profit. For a small business, having enough working capital is important for covering daily expenses, including payroll, inventory, and accounts payable.That’s why here is considered a liability and the same is credited while preparing the books of accounts. Here the definition of capital will not be the same as in other displaces –especially the dictionary meaning of the same. In the balance sheet word, one will refer to the capital as the obligations that they had to undergo trough in order to source for the capital goods. Within the context, the term capital refers here to the loan that the owner of the business uses to buy goods and later sell at a profit. That’s why capitalist refer to as a special liability
Capital differs from investment and that’s why it’s a special liability
Capital and investment are two separate things that are always confused by any to mean one thing. Investment can be done in the short term and still in the long-term. The process o investing include another process of the purchasing and the selling of resources. In short, I mean that capital is the source of funds while investment is the deployment of funds. Thus capital in the balance sheet will be shown liabilities while investment will be shown on the side of assets. Most people view capital to be an investment but that is not the case as we have seen that basis in the categorizing of capital as a special liability and not an asset as many people will view it
The owner of the business lends its own business money
While starting a business, you need funds or capital which is anything that the owner of the business brings forth to commence the business. Here we see that there are different things that the owner of the business could have none with the money but he chooses not to and lends the money to the business in form of capital which is expected to earn viable returns. That’s why capital forms a special liability and it not the same as other long term or short term liabilities in business. We view capital here as the shareholder in a business appointed by the owner to yield some viable returns.
In conclusion, while preparing your balance sheet, always input capital in the credit column it’s a special liability.