Entity concept

Entity concept

[In accounting the separate entity concept"' treats a business as distinct and completely separate from the owners. The business stands apart from other organizations as separate economic unit. It is necessary to record the business transactions separately to distinguish it from the owner's personal transactions.This concept is now extended to accounting for various divisions of a firm in order to ascertain results for each division.

The idea here is that the financial transactions of one individual or a group of individuals must be kept separate from any unrelated financial transactions of those same individuals or group.

The best example here concerns that of the sole trader or one man business: in this situation you may have the sole trader taking money by way of 'drawings': money for his own personal use. Despite it being his business and apparently his money, there are still two aspects to the transaction: the business is 'giving' money and the individual is 'receiving' money.

So, the affairs of the individuals behind a business must be kept separate from the affairs of the business itself.

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