Business Entity Concept
The business entity concept states that the business enterprise is separate from its owner. In simple terms, for accounting purposes, the business and its owners are treated separately. If an owner invests money in the business, it will be treated as a liability for the business. However, if the owner takes out some money from the business for personal use, it will be considered drawings. Therefore, assets and liabilities of a business are the business’s assets and liabilities, not the owner’s. Hence, the books of accounts include the accounting records from the point of view of the business instead of the owner. For example, the amount of 1,00,000 in ABC Ltd. by its owner Raj will be considered a liability to the business. The business entity concept applies to partnerships, companies, sole proprietorships, small enterprises, and large enterprises.
Accounting Concepts: Types, Examples & Principles
Theory Base of Accounting consists of accounting concepts, principles, rules, guidelines, and standards that help an individual understand the basics of accounting. These Concepts are developed over time to bring consistency and uniformity to the accounting process.
GAAP or Generally Accepted Accounting Principles are the rules and procedures defined and developed by the Financial Accounting Standards Board (FASB) that an organization has to follow for the proper creation of financial statements consistent with the industry standards. The General Accepted Accounting Principles are also known as Accounting Concepts. The primary objective of GAAP is to ensure a basic level of consistency in the accounting statements of an organization. Financial statements prepared with the help of GAAP can be easily used by the external users of the accounts of a company.
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