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 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.
Examples:
- The amount invested by the owner in the business is credited in the capital account.
- When the owner withdraws money, goods or assets for personal use or when any personal expenses is paid from the business, all these are debited to drawings account.
- Firm gives interest on owner’s capital and charges interest on drawings.
- The Independent branch prepares its own trial balance separately.
- Profit is credited to the capital account.
- The capital of the owner of the business is recorded as a liability in the Balance sheet.
