I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

Business entity concept

. Regardless of how a business is legally set up, for accounting purposes, a 

business is always treated separately from its owner(s).   

 

Liza Doolittle starts a business. The business begins by owning the cash that Liza has put into it, 

$2,500. The business is a separate entity in accounting terms and so it owes the money to Liza as 

capital.  

In accounting, 

capital

 is an investment of money (funds) with the intention of earning a return. A 

business proprietor invests capital with the intention of earning profit. As long as that money is invested, 

accountants will treat the capital as money owed to the proprietor by the business. 

 

When Liza Doolittle sets up her business: 

Capital invested 

=  $2,500

Cash = 

$2,500

Capital invested is a form of liability, because it is an amount owed by the business to its owner(s). 

Adapting this to the idea that assets and liabilities are always equal amounts, we can state the 

accounting equation as follows.