The conceptual distinction between liabilities and equity : a new approach required (1998)
AuthorsCrook, Kimberleyshow all
This thesis examines the conceptual distinction between liabilities and equity, in the context of business entities, by means of a literature review. It is shown that the conceptual distinction between liabilities and equity requires consideration of the underlying equity theory. Various equity theories are compared, including the entity, proprietary and residual equity theories, which each view liabilities and equity, and the distinction between the two, differently. In addition to these well-known equity theories, another equity theory is presented, that has received little specific attention as an equity theory in the literature, but nevertheless appears to have considerable support. This other theory is termed the noncompulsion equity theory for the purposes of this thesis. Despite the support from the accounting literature, it is shown that the non-compulsion equity theory appears to have little support from either the law or the economics literature. Given that accounting takes place in the wider legal and economic environment, this suggests that the non-compulsion equity theory may not be an appropriate basis for distinguishing between liabilities and equity. A review of the accounting conceptual statements reveals that they are inconsistent in their application of an underlying equity theory, because they use several equity theories rather than one, including the non-compulsion equity theory, which is adopted by the conceptual statements' definitions of liabilities and equity. A closer examination of the non-compulsion equity theory demonstrates that it is based upon inconsistent reasoning and questionable assumptions, suggesting that it is fundamentally flawed. This thesis concludes by rejecting the non-compulsion equity theory as a basis for distinguishing between liabilities and equity, suggesting that a new approach is required. The residual equity theory seems likely to provide a suitable alternative.