Entity Concept of Accounting
The above video gives an indepth understanding of the Entity Concept of Accounting. However if you wish to read instead of watching a video tutorial, read along.
What is Entity Concept?
Entity Concept is a concept in accounting which says that the identity of any Business is separate from that of its owner or owners.
This concept emerged with the introduction of Joint Stock Companies in the 19th Century.
Following points are to be kept in mind in relation to Entity Concept:
- Separate Set of Books for the Business are kept. The personal Assets, Liabilities, Income or Expenses of the Owner or any other related party of the business are not recorded in the books of accounts of the Business.
- All transactions with the Related parties such as the Owner or employees are recorded in the books of accounts of the business in the same manner as other entries with outsiders are recorded.
- This concept helps not mix up the business affairs with the personal affairs of the owners.
- Entity Concept is also called Separate Entity Concept or Separate Legal Entity Concept.
Example to Understand the Entity Concept Better
Suppose Mr Ram is a Businessman who has two businesses:
- Ram Sweets; and
- Ram Textiles
So Mr Ram will have to maintain separate set of accounting records for both the businesses and ensure that the transactions of both the businesses does not mix with each other. He also has to ensure that his personal transactions are not recorded into the books of accounts of the businesses.
This way he will be able to determine the true and fair results (i.e. Profits/Losses) and financial position (i.e Net Worth) of his businesses.
I would recommend you to watch the video once if you have not watched it till now.
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