What is Business Entity Concept
Business entity concept is one of the accounting concepts that states that business and the owner are two separate entities and therefore, should be considered separate from each other.
As per this concept, the financial transactions pertaining to the business entity should be recorded separately from the business owners transactions.
This concept is also known as the Economic Entity Concept, which means that the owner of the business and the business itself are considered as two separate entities.
Therefore, any transactions or events that impact the business will be recorded and events that impact any other entities apart from the business will be considered as irrelevant and not be entertained.
If the transactions are not recorded in a mixed manner (involving both business and business owners in one statement) it will make the accounting information less usable.
Importance of Business Entity Concept in Accounting
Business entity concept is important in accounting for the following reasons:
1. The business entity concept is very important as it helps to measure the performance of a business separate from its owner and on different parameters such as cash flows, profitability, etc.
2. If the business organisation record mixes with the records of the business owners, it creates an inaccurate representation of the financial position of business. The business entity concept helps in preventing such an issue.
3. It helps the business in comparison of financial performance with other business organisations.
4. It helps in calculation of separate taxes for the business and its owners.
5. It helps in ascertaining the value of the assets and liabilities of a business in the event of any legal action taken against the business.
This concludes the topic of Business Entity Concept, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.