The Business Entity Concept

According to the business entity concept,an enterprise and its owner are two separate entities for accounting purposes.For instance,when the owner invests money in a business,an enterprise receives the cash which is treated as an asset of an enterprise and the capital of the business is treated as a liability of a firm.When the owner withdraws money from a business for his personal use,it is treated as drawings and when the owner use his personal cash for the payment of a school fee it is not recorded in the books of accounts of a firm.In this way the business and personal transactions can’t be mixed up.For accounting purposes this concept requires a distinction between business transactions and personal transactions.Concept of business entity is applicable to all types of business organizations viz sole proprietorship,partnership firm and a joint stock company only for accounting purposes and not for a legal purpose.The business entity concept can be easily applied in the case of a limited liability company because it is a legal entity separate from its shareholders,it can sue and be sued in its own name instead of in the name of all its owners.The business entity has the following effects which are as- Only the transactions of the business are recorded and not the personal transactions of the owner,Income or profit is the property of a business unless it is distributed to the owner,the personal assets of the owner are not taken into consideration while calculating the value of the assets of an enterprise,the profit or loss of an enterprise can be easily and correctly calculated,the financial position of a firm can be easily determined.The capital of a proprietor is considered as a liability of an enterprise to its owner,the drawings and losses are treated as reduction of liability while profits and additional capital introduced are treated as an increase in a liability.From the above the conclusion is drawn that only those transactions are recorded which affect the business and not the owner of an enterprise.Therefore,a business unit and its owner are two different entities and accounting records are kept only from the point of view of an enterprise and not the owner.

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