Balance sheet is the statement which is made on the basis of accounting equation. In simple accounting equation, total assets will always equal to total liabilities. Total liabilities are divided into two parts. One is outside liability and other is inside liability. Inside liability is owner's capital. So, we keep capital in the liability
side of balance sheet. There are lots of reasons behind this which we are explaining in following points.
1. Company is Separate from Shareholders
Some may say it is the investment of owner or shareholder. Why does it keep in liability side instead of asset side. Actually, it is the investment of owner or shareholder but not of business or company. Business is separate from businessman. Business takes money from businessman for operating business. It will be returned one day. So, it is the liability of business. We all see when a shareholder need money, he sells his shares immediately. It means, same liability is transferred from one shareholder to other shareholder. But in the balance sheet, share capital will be same. But when company liquidates, share capital is also returned to its shareholder. In small business, you also see that when a businessman closed his business, he carried all things for his personal use. So, it should be clear that share capital must appear on the liabilities side of balance sheet.
2. Shareholder Gets Earning from his Shares
you see when a person invests his money in bank, he gets earning in the form of interest. All these money is shown in the liability side of balance sheet of bank. It is just like loan taken by bank from his customer. Like this, company issues shares. Company uses this money for his business. When company earns money, shareholders get earning from his shares. So, company can give dividend to shareholders if shareholders money will show in the liability side. It is the liability of company and company gives happiness to shareholders by giving them dividend reward.
3. It is the Source of Fund
Instead of thinking it as liability, you can think it as source of fund. Suppose, a company has big project. Suppose it wants to make a big budget film. For paying actors, travelling, technical fees, it needs big money. Company issues the shares. By issuing shares, company invites the public for buying their shares. It is called IPO ( Initial public offering). When public buys the shares, it becomes the source of his total fund. Now, it is shown in the source of fund. Other side will be the application of fund. Now, in simple words, we say source of fund as liability and application of fund as assets.
4. Share Capital is Different from Debt
Debt can easily identify as liability of business because it must be payable after sometime. We have to pay interest on debt with fixed rate. But share capital is also given money to company but we do not include it in the debt because shareholder are the real owner of business. They have right to vote. They have made the board of directors. They take big decisions through his voting rights. They suffers the losses. So, difference between the total assets and debt will be share capital. It means, if we sell everything and pay our total debt, rest will be the part of share capital. So, share capital and total debt is equal to total assets.
side of balance sheet. There are lots of reasons behind this which we are explaining in following points.
1. Company is Separate from Shareholders
Some may say it is the investment of owner or shareholder. Why does it keep in liability side instead of asset side. Actually, it is the investment of owner or shareholder but not of business or company. Business is separate from businessman. Business takes money from businessman for operating business. It will be returned one day. So, it is the liability of business. We all see when a shareholder need money, he sells his shares immediately. It means, same liability is transferred from one shareholder to other shareholder. But in the balance sheet, share capital will be same. But when company liquidates, share capital is also returned to its shareholder. In small business, you also see that when a businessman closed his business, he carried all things for his personal use. So, it should be clear that share capital must appear on the liabilities side of balance sheet.
2. Shareholder Gets Earning from his Shares
you see when a person invests his money in bank, he gets earning in the form of interest. All these money is shown in the liability side of balance sheet of bank. It is just like loan taken by bank from his customer. Like this, company issues shares. Company uses this money for his business. When company earns money, shareholders get earning from his shares. So, company can give dividend to shareholders if shareholders money will show in the liability side. It is the liability of company and company gives happiness to shareholders by giving them dividend reward.
3. It is the Source of Fund
Instead of thinking it as liability, you can think it as source of fund. Suppose, a company has big project. Suppose it wants to make a big budget film. For paying actors, travelling, technical fees, it needs big money. Company issues the shares. By issuing shares, company invites the public for buying their shares. It is called IPO ( Initial public offering). When public buys the shares, it becomes the source of his total fund. Now, it is shown in the source of fund. Other side will be the application of fund. Now, in simple words, we say source of fund as liability and application of fund as assets.
4. Share Capital is Different from Debt
Debt can easily identify as liability of business because it must be payable after sometime. We have to pay interest on debt with fixed rate. But share capital is also given money to company but we do not include it in the debt because shareholder are the real owner of business. They have right to vote. They have made the board of directors. They take big decisions through his voting rights. They suffers the losses. So, difference between the total assets and debt will be share capital. It means, if we sell everything and pay our total debt, rest will be the part of share capital. So, share capital and total debt is equal to total assets.
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