Business Entity Concept

According to the concept of business entity business has a distinct and separate entity from its owners. In other words it means that for the purposes of accounting, the business and its owners are to be treated as two separate entities.

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. Hence, 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. 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.

For example if suppose you start new business and invest 10000$ then it is treated as liability form the point of view of the business. In the same way suppose your business is of manufacturing pens and you take 10 pens then it is treated as drawings by you and relevant entries will be made in the books of accounts.

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