For the purpose of accounting, the business will be treated quite separately from the owner of the business. The business is a different person and the owner is also a different person. Business transactions are recorded in the books of business, while personal transactions of the owner are not recorded in the books of business.
From business point of view, the owner’s amount is payable to him due to which there is no difference between a creditor and the owner. The owner makes investments in the business which means that the owner has given the amount to the business and the business has received the amount from the owner of the business. The personal assets of the owner are not included in the assets of the business. The capital invested by the owner in the business is a type of liability of the business.
The concept of business entity is applicable to all forms of business organisations. This concept is clearly observed in limited company as a limited company obtains separate individual personality by law.
Because of the concept of business entity, the transactions between the business unit and the owner are recorded in the following manner in the books of accounts:
- The amount invested by the owner in the business is credited in the capital account which is liability of the business.
- When the owner withdraws money for personal use or when any personal expenses is paid from the business or assets are withdrawn by the owner from the business, all these are debited to drawings account.
According to accounting entity, It is assumed that business has the separate existence and its entity is different from that of its owner(s). Each business is considered as a separate entity in spite of common owner thereof.
Accounting entity comprises of proprietorship, partnership firm, corporation, limited company, co-operative society and non-trading concerns as well.
