2.Business Entity Concept or Separate Entity Concept:
No doubt, legally, only a joint stock company is distinct entity apart from the shareholders owning it. But, in accounting, every business undertaking, whether it is a sole-trading concern or a partnership firm or a joint stock company, is considered as a distinct entity from the persons who own it. As the business and the proprietors, who own the business, are regarded as two separate entities (i.e., parties), the transactions of the business are distinguished from those of the proprietors, and in the books of the business, accounts are kept only for the transactions of the business, and not for those of the proprietors.
The benefits of this concept are:
(a) This concept is useful in keeping the affairs of the business quite separate from the private affairs of the proprietors of the business.
(b) As the business is regarded as a separate entity (i.e., an entity or party distinct from the owner of the business), the transactions between the proprietor of the business and the business are recorded in the books of the business. It is on account of this concept that the capital invested by the proprietor of the business is regarded as money borrowed by the business from the proprietor, and so, is shown as the liability of the business in the balance sheet of the business. Again, it is on account of this concept that the drawings of the proprietor (i.e., the amounts withdrawn by the proprietor from the business) are regarded as amounts due from the proprietor to the business, and so, are deducted from his capital on the liabilities side of the balance sheet.
(c) Because of this concept, the profit or loss of the business can be easily ascertained.
(d) Because of this concept, the financial position of the business can easily ascertained.
(e) By extending the business entity concept to the various departments of a concern and by maintaining separate accounting records for the transactions of each of the departments of the concern, a clear picture of the efficiency (i.e., the profit or loss) of each of the departments of the concern can be obtained.
No doubt, legally, only a joint stock company is distinct entity apart from the shareholders owning it. But, in accounting, every business undertaking, whether it is a sole-trading concern or a partnership firm or a joint stock company, is considered as a distinct entity from the persons who own it. As the business and the proprietors, who own the business, are regarded as two separate entities (i.e., parties), the transactions of the business are distinguished from those of the proprietors, and in the books of the business, accounts are kept only for the transactions of the business, and not for those of the proprietors.
The benefits of this concept are:
(a) This concept is useful in keeping the affairs of the business quite separate from the private affairs of the proprietors of the business.
(b) As the business is regarded as a separate entity (i.e., an entity or party distinct from the owner of the business), the transactions between the proprietor of the business and the business are recorded in the books of the business. It is on account of this concept that the capital invested by the proprietor of the business is regarded as money borrowed by the business from the proprietor, and so, is shown as the liability of the business in the balance sheet of the business. Again, it is on account of this concept that the drawings of the proprietor (i.e., the amounts withdrawn by the proprietor from the business) are regarded as amounts due from the proprietor to the business, and so, are deducted from his capital on the liabilities side of the balance sheet.
(c) Because of this concept, the profit or loss of the business can be easily ascertained.
(d) Because of this concept, the financial position of the business can easily ascertained.
(e) By extending the business entity concept to the various departments of a concern and by maintaining separate accounting records for the transactions of each of the departments of the concern, a clear picture of the efficiency (i.e., the profit or loss) of each of the departments of the concern can be obtained.
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