Every business acquires funds from internal as well as from external sources. According to the business entity concept, the amount borrowed from the external sources together with the internal sources like capital invested by the proprietor is termed as a liability to the business. The business entity concept treats business and business owners separately. The capital of the owner is treated as a liability to the business because the business has to repay the amount of capital to the owner, in case of closure of the business. As liability incurred is credited, in the same way, fresh capital introduced and net profit increases the owner’s capital, and so, capital is credited. On the other hand, if liability is paid, it reduces liability, and so, it is debited. Similarly, drawings from the capital and net loss reduce the capital, and so, capital is debited. Thus the rules of debit and credit are the same for both liability and capital.