Why is Capital Treated As A Liability

Capital is considered as an Internal Liability because the amount of cash, goods, assets invested by the sole owner or owners in the business are payable by the business to its owners. It is the claims or rights of the owners of the business against the Assets of the business. In fact, there are two claims against the assets of the business. One is from External Parties known as External Liabilities Or Simply Liabilities while claims from owners of the business is considered as Internal Liabilities or Equity in case of company or Owner’s Equity or Capital in case of Proprietorship or Partnership Businesses.

The business being a Separate Legal Entity according to Business Entity Concept, is bound to pay not only its external liabilities but also its internal liabilities in order to own the rights of its assets.