- 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.
- The accounting records are made in the book of accounts from the point of view of the business unit and not that of the owner.
- The personal assets and liabilities of the owner are, therefore, not considered while recording and reporting the assets and liabilities of the business.
- Similarly, personal transactions of the owner are not recorded in the books of the business, unless it involves inflow or outflow of business funds.
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