In accounting, the business entity concept increases the owner’s accountability whenever the business capital is utilized for personal use. It compels the business and owner to be responsible for their separate financial obligations. This principle can also apply to the owners of multiple companies.
How Does it Work?The business entity concept should be applied to every type of businessA business entity is one that conducts business in accordance with the laws of the country. It can be a private company, a public company, a limited or unlimited partnership, a statutory corporation, a holding company, a subsidiary company, and so on.read more (sole proprietorship, partnership, and corporation) to retain financial integrity for those involved in the company. The purpose of the concept is to ensure the business’ financial statementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more reflect the company’s performance. It allows shareholders and other stakeholders to determine its financial performance and positioning. In accounting, the business entity concept prevents personal and business expenses from becoming entangled, interfering in determining the correct taxable information. Any money moving to or from the company should be recorded in a separate accounting journalAccounting journal, often known as the book of original entry, is first used to record the company's accounting record whenever a financial transaction occurs. It's difficult to comprehend, yet it's crucial in business operations and accounting.read more to avoid confusion. You are free to use this image on your website, templates, etc, Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Business Entity Concept (wallstreetmojo.com) Examples of Business Entity Concept
Why is it Important?The business entity concept is extremely important for business owners for several reasons described below. You are free to use this image on your website, templates, etc, Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Business Entity Concept (wallstreetmojo.com)
Limitations of Business Entity ConceptAlthough the concept is helpful in many situations, it also has limitations. These include: A corporate shield is a legal form of protection, whereas the business entity concept applies to recordkeeping and accounting practices. The corporate veil shields the owners from liabilities about the business, like lawsuits. Legally, it’s important to understand this concept does not include basic partnerships or sole proprietorships.
Recommended ArticlesThis has been a guide to Business Entity Concept and its definition. Here we discuss how it works along with the examples and why it is important. You may also have a look at the following articles to learn more –
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