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The Business Entity Assumptions

[Separate Entity Concept]

The entity means a separate thing. For accounting purposes, an entity is defined as the organizational unit for which accounting records are maintained. Accounting is concerned with a specifically defined entity. Each business enterprise is considered as an accounting unit separate and apart from its owner(s), creditors and other entities. The business and businessman are two separate and distinct entities. Each Business entity is treated for accounting purposes as earning its own revenues. Incurring its own expenses, owing its own assets and owing its own liabilities. The accounting entity is not necessarily a separate legal entity in some cases. In accounting, however, every type of business organization, be it sole trader ship firm or partnership, is treated a separate accounting or economic entity. The entity concept therefore, establishes fictional distinction between the owners and the business which is not recognized at law in some cases. The business entity concept defines the range and boundaries of the accountant’s activity and limits the number of transactions that are to be included in the records of an enterprise. The over-all effect of adopting this concept is: (i) Only the transactions of business are recorded and reported and not the personal transactions of the owners. (ii) Income or profit is the property of the business unless distributed to the owners. (iii) The personal assets of owners or shareholders are not taken into consideration while considering the assets of the business enterprises. (iv) The capital of the business is considered as a liability of the business to its owner(s); drawing and losses are regarded as a liability. (v) The accounts do not make it clear to the creditors especially for a sole proprietorship and partnership firm, what actual assets are available to meet their claims or what other liabilities must be met out of the assets, (vi) This concept has enabled the development of responsibility accounting so that it is possible to know not only the profit or loss of the business enterprises on the whole but also of the various divisions and departments.

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