Significance of Business Entity Concept
1. Keeps it simple: Business entity concept prevents the entanglement of personal finances and business finances.
2. Accountability: In case, the owner withdraws any amount from the business for personal use i.e. drawings, he/she will remain accountable and answerable for the use of finances for personal use. He/she will be held responsible for any diversion of funds.
3. Tax benefit: Keeping personal and business finances away from each other gives tax benefits to the owner. At the time of filing tax, the business entity concept prevents disruption of cash flows and profitability.
4. Business Performance: Having separate business records helps the stakeholders in the evaluation of business position only. The company’s financial position is relevant from various perspectives and is relevant for various parties.
5. Comparison: The company’s financial position helps in the comparison of businesses by SWOT (strengths, weaknesses, opportunities, and threats) analysis. SWOT remains helpful for comparison only if it is of business and not a combination of business and personal finances.
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