Business Entity Concept : In accounting, business is treated as separate entity from its owners.
Accounts are prepared to give information about the business and not about those who own it. A
distinction is made between business transactions and personal transactions. Without such a
distinction, the affairs of the business will be mixed up with the private affairs of the proprietor and
the true picture of the firm will not be available.
The 'business' and 'owner' are taken as two
separate entities. The accountant is interested to record transactions relating to business only. The
private transactions of the owner will be recorded separately and will have no bearing on the
business transactions. All the transactions of the business are recorded in the books of the business
from the point of view of the business as an entity and even the proprietor is treated as a creditor to
the extent of his capital. The concept of separate entity is applicable to all of business organizations.
For example, in case of a sole proprietorship business or partnership business, though the sole
proprietor or partners are not considered as separate entities in the eyes of law, yet for accounting
purposes they will be considered as separate entities. In the case of Joint Stock Company, the
business has a separate legal entity than the shareholders. The coming and going shareholders do
not affect the entity of the business. Thus, the distinction between owner and the business unit has
helped accounting in reporting profitability more objectively and fairly. It has also led to the
development of ‘responsibility accounting’ which enables us to find out the profitability of even the
different sub-units of the main business.
