Question

Regarding fundamental accounting principles, which statement accurately reflects the “Entity Concept”?

1. The Entity Concept emphasizes that a business’s financial activities should be reported separately from the personal finances of its owners.
2. The Entity Concept dictates that all transactions should be recorded using a single currency.
3. The Entity Concept suggests that the money withdrawn by the proprietor from the firm for his personal use should be treated as drawings.
4. The Entity Concept focuses on matching revenues and expenses to determine net income.

Options

• Only 1.

• 2. & 3.

• Only 4.

• 1. and 3.

Answer 1

1. and 3.

Explanation:

• Statement 1: The Entity Concept treats a business as a separate legal and economic entity. As a result, the firm's financial transactions must be recorded and reported separately from the owner's own personal affairs.
• Statement 3: The owner and the firm are recognised as separate entities; any cash or products withdrawn by the owner for personal use cannot be claimed as a company expense. Instead, it must be reported as a draw, which lowers the owner’s capital account in the business books.