Need for Business Entity Concept

What is Business Entity Concept?

Under the Business Entity Concept, a business is treated as separate from its owners. Business and owners are two independent entities because business too is considered as an artificial person. 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, the assets and liabilities of a business are the business’s assets and liabilities, not the owner’s. A business’s financial obligations are different from that of the owner....

Need for Business Entity Concept

Business Entity Concept is needed for various purposes like as determining the individual financial position of the business, and the comparison between various businesses. This concept is also helpful when it comes to filing taxes, it will be easy and beneficial to file taxes when personal finances are not involved in business finances. Business Entity Concept is also helpful when it comes to dissolving the firm and repayment is to be done among different shareholders, debenture holders, and owners. Owner’s Equity also gets calculated easily when personal finances are not entangled with business finances....

Example of Business Entity Concept

Assume the owner needs to withdraw ₹50,000 for the construction of his/her own house. Such withdrawal acts will be known as Drawings, and it is not the expense of the business but the owner’s. The transaction must be written as Drawings to show the personal use of fund by the owner. If the owner invests money in the business, the amount is considered a loan to the business and is the liability of the firm towards the owner. The business must repay the loan to its owner....

Significance of Business Entity Concept

1. Keeps it simple: Business entity concept prevents the entanglement of personal finances and business finances....

Limitations of Business Entity Concept

1. Small businesses: In small businesses, especially sole proprietorships and partnerships, the line between personal and business transactions can be blurred out. The business entity concept may be difficult to apply when personal and business assets are mixed....