An Alternative Approach to Distinguishing Liabilities from Equity

57 Pages Posted: 18 Dec 2017 Last revised: 21 Oct 2020

See all articles by Mary Hill

Mary Hill

Kennesaw State University

Richard A. Price

University of Oklahoma

George W. Ruch

University of Denver - School of Accountancy

Date Written: May 26, 2020

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.

Keywords: Liabilities Versus Equity, Financial Reporting, Capital Structure

Suggested Citation

Hill, Mary and Price, Richard A. and Ruch, George W., An Alternative Approach to Distinguishing Liabilities from Equity (May 26, 2020). Available at SSRN: https://ssrn.com/abstract=3086824 or http://dx.doi.org/10.2139/ssrn.3086824

Mary Hill

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

Richard A. Price

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-5759 (Phone)

George W. Ruch (Contact Author)

University of Denver - School of Accountancy ( email )

2101 South University
Boulevard, Suite 355
Denver, CO 80208-8921
United States

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