Business Entity – Concept, Types, Importance, Limitations and Example


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

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.