Q.Why are the rules of debit and credit same for both liability and capital?
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Start your 14-day free trial to unlock the full solution →Capital and liabilities follow the same rule of debit and credit because both are claims against the assets of the business — capital is the owner's claim and liabilities are outsiders' claims — and both sit on the same (equities) side of the accounting equation Assets = Liabilities + Capital. Being of the same nature, both are credited when they increase and debited when they decrease.
The reason explained
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Both are claims against the business — From the business's point of view (the separate entity concept), the business owes its capital to the owner just as it owes its liabilities to outsiders. Capital is the internal liability (owner's claim) and other liabilities are external (creditors' claims). In substance, both represent obligations of the business.
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Both lie on the same side of the accounting equation — The accounting equation is:
| Assets | = | Liabilities | + | Capital |
|---|
Liabilities and capital together form the right-hand (equities) side, showing the sources of the funds invested in the assets. Items of the same side and same nature must be governed by the same rule.
- Same rule follows from the same nature — For accounts of liabilities and capital (which have credit balances):
| Change | Treatment |
|---|---|
| Increase in liability or capital | Credit |
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