Introduction To Accounting: Part 12: Business Entity Concept Or Separate Entity Concept

Nishant Kumar
28/06/2017 0 0
  1. Suppose you open a book store, so, in common parlance, it would be said that the business is being carried on by you, and you are earning profit or incurring loss.

  2. However, Accounting sees it differently.

  3. According to the Business Entity Principle, a Business Entity is considered to be separate and distinct from its owners.

  4. This means that the Business Entity is doing the business and not you; the Business Entity has earned the profit and not you; the Business Entity has incurred loss and not you!

  5. This is done basically to distinguish between the Business Transactions and Personal Transactions. For example: If you go out for a movie with your friends, you wouldn’t record it in the books of accounts of your business → This is your personal expense, not a business expense. If the Separate Entity concept was not there, you would have recorded your movie expenses in the books of accounts of the business, and that would have led to an incorrect profit.

  6. Business transactions, therefore, are recorded in the books of account from the business’s point of view and not from that of the owner’s.

  7. Owners being regarded as separate and distinct from business, they are considered creditors of the business to the extent of their capital (Capital is the amount of money invested in the business by the Proprietor/Owner).

  8. Therefore, any money that the Proprietor invests in Business is a liability of the Business towards the Proprietor, i.e. the Business owes that money to the Proprietor.

  9. So, if the Proprietor withdraws some money, out of his investment in the business, for his personal use, the Capital reduces, i.e. Liability of the Business towards the Proprietor reduces.

  10. Similarly, if the Proprietor invests some additional money in the business, the Capital increases, i.e. Liability of the Business towards the Proprietor increases.

 

0 Dislike
Follow 0

Please Enter a comment

Submit

Other Lessons for You

Rules of debit and credit
Personal account: Debit the receiver and credit the giverReal account: Debit what comes in and credit what goes outNominal account: Debit all expenses & losses and credit all incomes & gains

Pankaj Agarwal | 1 day ago

0 0
0
The sacredness of Planck's Constant
Many times people ask this question: have you seen god/ghost? Or do you believe in them? And you must have seen many people answering this as: I have not seen any of them. So how can I believe it? Well,...

Arka Prava Sarkar | 5 days ago

0 0
0
DEPENDENT BRANCH
Dependent Branch: A branch which is dependent upon Head Office mainly for “Goods and Cash”. Books of accounts relating to such branch also will be maintained by Head Office. Features of Dependent...
ELECTROCHEMISTRY
(a) The process of chemical decomposition of an electrolyte on the passing of electric current through its aqueous solution or in its molten state is known as electrolysis.(b) It involves oxidation...
Electrostatics
Sometimes children play with the comb which attracts pieces of paper. We should know about the charges which are at rest in order to understand the reasons behind this phenomenon. Many things like a...

M G Raghu Raman | 09 Apr

1 0
0

Find Best Class XI-XII Tuition (PUC) ?

Find Now »

UrbanPro.com is India's largest network of most trusted tutors and institutes. Over 25 lakh students rely on UrbanPro.com, to fulfill their learning requirements across 1,000+ categories. Using UrbanPro.com, parents, and students can compare multiple Tutors and Institutes and choose the one that best suits their requirements. More than 6.5 lakh verified Tutors and Institutes are helping millions of students every day and growing their tutoring business on UrbanPro.com. Whether you are looking for a tutor to learn mathematics, a German language trainer to brush up your German language skills or an institute to upgrade your IT skills, we have got the best selection of Tutors and Training Institutes for you. Read more