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Why profit is added to capital and loss subtracted from capital?

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posted Jul 14 by Naveen Kumar

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1 Answer

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According to Separate Accounting Entity concept, the business is considered separate from its owners. While writing the books of accounts, we write the books of business and not the owner. Owner may have other business also. So if we are writing the books of business, then loss is incurred or profit is made by the business and not the owner. According to Separate Accounting Entity concept the amount invested by the owner in the business is a liability of the business towards the owner. Hence any earnings made by the business are added to capital and any loss incurred is subtracted from capital.

answer Jul 15 by Shamita
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