Question

If a radio seller-proprietor buys a radio for his personal use from out of business funds, the amount paid for the radio will be treated as "drawings" of the proprietor because of __________.

• A. dual aspect concept
• B. going concern concept
• C. business entity concept
• D. matching concept

Answer 1

Answer: (C)

business entity concept

The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner.

Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit).

Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business.

Hence, the above case will be considered as drawings as per the business entity concept,