Why
are the rules of debit and credit same for both liability and
capital?
Why are the rules of debit and credit same for both liability and capital?
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.
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.
