Business Entity Concept – Complete Details, Here we are providing complete discussion on Business Entity Concept like Meaning of Business Entity Concept, Main effect of this concept with example and Importance of Business Entity Concept. Recently we provide Debt Ratio – Debt service coverage Ratio, Now we are providing complete details for Business Entity Concept, Scroll down below and check full details.
Meaning of Business Entity Concept
Accounting relies on many assumptions . Among these assumptions Business entity concept is a considerable one.As per explanation given by Cambridge dictionary Business entity concept means ” the idea that in accounting a business organization should be treated completely separate from the personal business of the people who own it or work in it “.In simple terms Business entity concept explains that the business is distinct and separate from its owners i.e. business and its owners should not be treated as one and the same thing.
Main effect of this concept
Business entities are organized either as a proprietorship, a partnership or a company. They differ on the level of control the ultimate owners who exercise various powers over it ,but in all forms the personal transactions of the owners should not be mixed up with the transactions and accounts of the business.
If you are the owner a business entity and pay yourself some amount as salary from the business, you should record these transactions in the financial statements of the business. if on the other hand you invest available funds in another company or buy into a money market account, this is not shown in the financial statements of the company because there is no effect on the financial status of the business.
This concept plays a key role in financial statements preparation.This principle allows accountants to examine businesses separately regardless of their ownership status. It also creates a means of producing financial statements that reflect how a business organization is performing, even if public perception is different because of financial activities on the part of the owner. Another benefit of business entity assumption is the guideline that every transaction must be assigned to a single entity.
In simple terms this concept suggests that assets, liabilities, income and expenses of the business should be treated separate from the assets, liabilities, income and expenses of its owners. Business can ownan asset on its name. Business incurs an expense under its name. It can have a liabilities under its name and liabilities of the business does not mean this is to be paid by the owner of the business.