Accountancy · Ch 1 — Introduction to Accounting
Capital
Capital
Capital – The Owner's Claim
Capital is the amount the owner invests in the business. It can be brought in as cash or as any other asset (like machinery, furniture, or stock). From the business's point of view, capital is not a free resource — it is an obligation. The business owes this amount to the owner, just as it owes money to any other creditor. That is why capital appears on the liabilities side of the balance sheet.
Capital is the owner's claim on the assets of the business. It is a liability of the business entity to its owner.
Accounting Treatment
When the owner brings capital into the business, the business receives an asset (cash or another asset) and simultaneously creates an obligation (capital). The journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Cash/Bank A/c (or Asset A/c) | Dr. | |||
| To Capital A/c |
Why this entry?
- Debit the asset account because the business receives an asset (increase in asset).
- Credit the capital account because the business's obligation to the owner increases (increase in liability).
Where Capital Appears
Capital is shown on the liabilities side of the balance sheet, under the head Shareholders' Funds (or Owner's Equity in a sole proprietorship). It is not a current liability — it is a long-term, permanent obligation of the business to its owner.
Key Points to Remember
- Capital can be brought in as cash or any other asset (e.g., machinery, building, stock).
- It is a claim of the owner on the business's assets.
- It is recorded on the liabilities side of the balance sheet. …