What is the Business Entity Concept
The concept of business entity believes that business has a distinct and separate entity from its owners. The business and the owners of the business are two separate entities.
- When the owner brings some money to the business, it becomes a liability for the business. This money is called capital.
- Separate records are to be maintained for the owner and for the business.
- Accounting records are made for the business, not for the owner
- Owner is supposed to be providing money to different separate entity as capital.
- When the owner withdraws any money from the business for his personal expenses is called drawings. It reduces the liability of the business
Types of Business Entity Concept
- Sole proprietorship
- Joint Hindu Family business
- Co-operative society
- Joint-stock company
Importance of Business Entity Concept
- It Helps in to calculate the accurate profit of the business.
- It Helps To make the accounting easy for the business.
- it Helps in calculation of tax separately for the business and owner.
- It Helps to Create Budget and Future Projections.
- It Helps in Evaluating the Performance of Business.
- It Helps in providing true and fair statement of the business.
Limitations of Business Entity Concept
- True value or net worth of the owner is not visible as the business is separate.
- The owner is separate so when he needs the invested amount back it will be drawing for the business.
- The owner creates a budget for the business it shows the value of the business not the owner.
Example of Business Entity Concept
Aman is running a small sole proprietor business. He starts the business with the saving of the last year. Now, He opens a shop with the name of Aman Enterprise. Aman Enterprise is a separate legal person than the owner (Aman). If aman need the money form the business then It will be drawing for the business.