Business Entity Concept

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This entry is part 1 of 1 in the series Accounting Concepts

A business concern is separate and distinct from its owner, irrespective of the nature of the organization i.e. sole proprietorship, partnership or joint stock company.

The accounting equation ‘Capital + Liabilities = Assets’ clearly reflects the application of the business entity concept. Like other claimants (creditors, lenders, investors), the owner also owes money from the business in the form of the money invested as capital along with profit or loss made. This clearly draws a line of demarcation between business and owner, between business transactions and personal transactions, between business assets and personal assets or liabilities or income in the same way.

For example, when a person starts a business with some initial amount of capital, the Cash A/c is debited and the Capital A/c is credited. This will be his investment in the business. So, we can say that ‘Business’ and Businessman (owner) are two separate entities.

The transactions in business are always recorded from the point of view of the business, but not from that of the businessman. A capital account is maintained in the business records to record investments and drawings by the owner(s).

Depending on the business, the liability of the owner(s) is defined. For example, in a sole proprietorship, the owner’s liability is unlimited as he/she being the 100% owner of the business.

 

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