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Entity Concept

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Entity Concept – Entity concept states that business enterprise is a separate identity apart from its owner. Accountants should treat a business as distinct from its owner. Business transactions are recorded in the business books of accounts and owner’s transactions in his personal books of accounts. The practice of distinguishing the affairs of the business from the personal affairs of the owners originated only in the early days of the double-entry book-keeping. This concept helps in keeping business affairs free from the in uence of the personal affairs of the owner. This basic concept is applied to all the organizations whether sole proprietorship or partnership or corporate entities.

Entity concept means that the enterprise is liable to the owner for capital investment made by the owner. Since the owner invested capital, which is also called risk capital he has claim on the pro t of the enterprise. A portion of pro t which is apportioned to the owner and is immediately payable becomes current liability in the case of corporate entities.

In Simple Words

Entity Concept – Business is separate from its owner.

Effects:

  • Owner’s Capital is shown as a Liability in the Business
  • Amount taken by Owner from business is recorded as Drawings.
  • Owner’s expenses are not recorded in the books of business and if payment is made from business, it is recorded as Drawings.
  • Proprietor cannot use the bank account of business for his personal transactions.
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