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.
Key Takeaways:
- Businesses and owners are treated as separate entities while recording transactions.
- Assets, liabilities, incomes, expenses, etc. belong to the business and not the owner.
- Books of accounts are prepared from the viewpoint of the business and not the owner.
- The business entity concept applies to partnerships, companies, sole proprietorships, small enterprises, and large enterprises.
Table of Content
- Need for Business Entity Concept
- Example of Business Entity Concept
- Significance of Business Entity Concept
- Limitations of Business Entity Concept
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