An alternative approach to distinguishing liabilities from equity
Department
School of Accountancy
Document Type
Article
Publication Date
3-1-2021
Abstract
In response to a longstanding debate within the accounting profession on how to clearly distinguish liabilities from equity, we offer an alternative liability-equity classification scheme (the ‘‘Earned Capital Approach’’) in which capital acquired in exchange for issuing claims (‘‘external capital’’) is classified as liabilities and capital acquired in exchange for providing goods and services (‘‘earned capital’’) is classified as equity. The Earned Capital Approach differs from the approach underlying current financial reporting standards in that it is based on a fundamental distinction between the firm and its claimants rather than a distinction between types of claimants (e.g., owners versus creditors). In this paper, we summarize the accounting profession’s ongoing attempts to distinguish liabilities from equity and discuss the conceptual underpinnings and financial reporting implications of the Earned Capital Approach.
Journal Title
Accounting Horizons
Journal ISSN
08887993
Volume
35
Issue
1
First Page
65
Last Page
85
Digital Object Identifier (DOI)
10.2308/HORIZONS-19-171