Unit-1 Basic Concepts Of Accounting

In this unit we intend to have an overview of Accounting and discuss its nature, scope and importance.

What do you understand by business entity concept?

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Learning Pundits Content Team

Written on Apr 16, 2019 11:11:08 AM

  • Business entity means a unit of organized business activity. In that sense, a provision store, a cloth dealer, an industrial establishment, an electricity supply undertaking, a bank, a school, a hospital, etc. are all business entities.
  • From the accounting point of view every business enterprise is an entity separate and distinct from its proprietor(s)/owner(s). The accounting system gives information only about the business and not its owner(s). In other words, we record those transactions in the books of account which relate only to the business. The owner's personal affairs (his expenditure on housing, food, clothing, etc.) will not appear in the books of account of his business. However, when personal expenditure of the owner is met from business funds it shall also he recorded in the business books. It will be recorded as drawings by the proprietor and not as business expenditure.
  • Another implication of business entity concept is that the owner of a business is to be treated as a creditor who also has a claim over the assets of the business. As such, the amount invested by him (capital) is regarded as a liability for the business.
  • The business entity concept is applicable to all forms of business organizations. This distinction can be easily maintained in the case of a limited company because the company has a legal entity of its own. But such distinction becomes difficult in case of a sole proprietorship or partnership, because in the eyes of the law the partner or the sole proprietor are not considered separate entities. 'They are personally liable for all business transactions. But for accounting purposes, they are to be treated :is separate entities. This enables them to ascertain the profit or loss of business more conveniently and accurately.