Question

What is business entity concept of accounting?

Write short note on Business Entity Concept.

Answer 1

The business entity concept is a fundamental accounting principle stating that a business and its owners are treated as separate entities. This means that the business's financial transactions are recorded separately from the personal financial transactions of the owners.

Answer 2

According to this concept, a business firm is treated as a unit separate and distinct from its owners. A completely separate set of books is kept for the firm and business transactions are recorded from the firm's point of view. The capital provided by the owner is treated as a liability of the firm. Interest on capital is treated as an expense of business. Similarly, the money/goods withdrawn by the proprietor from the firm for his personal use is treated as drawings. The concept of separate entity is necessary for ascertaining the true net profits and financial position of a business firm. In the absence of this concept, the affairs of the firm will be all mixed up with the private affairs of the proprietor and the true picture of the firm will not be available. The assumption of business entity is applicable to all types of business sole proprietorship, partnership and company.

This concept is applied to all forms of business organisations for the following reasons:

1. To reach a solution to the problem of separating out the business transactions from the personal transactions of the owner.
2. To ascertain how successful the business has been.
3. To ensure proper use of funds by the owners.
4. To enter into transactions with outsiders in the name of the firm.