An Alternative Approach to Distinguishing Liabilities from Equity

43 Pages Posted: 18 Dec 2017 Last revised: 28 Sep 2019

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: September 17, 2019

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 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. This alternative approach to distinguishing liabilities from equity differs from the existing approach because in that it is based on a fundamental distinction between the firm and its claimants rather than a distinction between groups of these claimants (e.g., owners versus creditors). In this paper, we discuss the motivation for our alternative approach to distinguishing liabilities from equity, its conceptual underpinnings, and its financial reporting implications.

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 (September 17, 2019). 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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