Why Capital is considered as Internal Liability

Capital is the amount of money invested by the owner in the business. Say Reena is interested in doing a chocolate business , after sometime she has taken ₹ 40000 from her piggy bank which she collected since her childhood .

This 40,000 Reena wants to invest in her chocolate business , so it will be termed as Capital.

Now Business and Owner are treated as two different entities. If they both would be considered one entity then profit calculation can be misleading and false too.

Say Reena takes out some chocaltes everyday from her business and distribute free of cost to her cousins. In this case we can never calculate correct profit of Reena because she is using business products and giving free of cost to her relatives , thats why business and owner should be treated separate.

If Reena gives any chocolate to her cousin it should be treated as a transaction of personal use and should be termed as Drawings.

So when any amount is invested by owner in the business and as owner and business are two separate entities, therefore money invested by owner in the business will be treated as burden on the business

And technical word used for burden is called as Liability .

So Capital which owner invests in the business is considered as a burden on business .

So we call Capital as Internal Liability