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Why is Share Capital not an Asset

 


Before this, you have to know why share capital is a liability

1. Assets May be Bought with Share Capital 

Now understand that share capital is basis of assets. Some assets may be buy with share capital and some may be bought with loan. Now, if there is base of anything, it does not the same thing. Like you see the tree. Its base is its roots and inside water both are the sources for tree's growth. If tree is asset, then roots are its capital and inside water  is equal to loan to Tree. Tree will grow. It will cool the environment and helps to increase the inside water and increases its resources. Same apply on the business. Shareholder gives the fund to company and its share capital is liability of business. Company buys assets from this capital. It can buy building, furniture and even shares of other companies. All are useful to increase the share capital. Share capital is not asset but it is the source of making asset. All the share capital fund plus loan will equal to its total assets but we never say share capital is asset. 

2. Company and Shareholders are not Same

It is great logic. Company and shareholders are not same. If same, we may say capital as asset but it is not possible. Even in sole trade business owner is different from business. Whether business owner or shareholder have the dream to increase their wealth. Wealth will increase by buying assets and operating the business. So, shareholders supplies the money. But not in donation. It is done with condition, if company will earn money, some share will be given in the form of dividend to shareholder and always shareholder right to sell his share value. For shareholder, it is asset but for company it is liability. Simple formula. I am shareholder, I can sell it because it is my asset. If I am company, it is my liability, if shareholder wants to sell and if no other shareholder wants to buy, company will sell its assets and pay his liability. 

3. Share Capital will not Support to Bring Money in Company's Pocket

Any asset of company will the asset of company if it will support the company to bring money in its pocket. For example, there is online company who sells the ads and brings money in its pocket. Its all online investment will be its asset but when money comes in its pocket. It will divide into two parts. One part will give interest to the people who gave the loan to company. This loan  is liability. And money goes out of its pocket. Then company has to pay dividend on the number of shares bought by shareholders. It was happened because shareholders has the shares and every share, it has the part of total capital of company. So, it is liability of company to pay dividend to shareholders. And share capital is withdrawing the money from the pocket of company. That is reason, share capital is liability.


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