Business Entity Concept: According to this concept, business is treated as an entity separate from its owners, creditors, managers and others. All transactions of the business are recorded in the books of the business from the point of view of the business. Transactions are also recorded between the owner and the firm, for instance, when capital is provided by the owner, the accounting record will show the firm as having received so much money and as owing to the proprietor, means the enterprise is liable to the owner for capital investment made by the owner. Since the owner invested capital, which is also called risk capital he has claim on the profit of the enterprise.
The failure to recognize the business as a separate accounting entity would make it extremely difficult to evaluate the performance of the business since the private transactions would get mixed. The overall effect of adopting this concept is:
— Only the business transactions are recorded and reported and not the personal transactions of the owners.
— Income or profit is the property of the business unless distributed among the owners.
— The personal assets of the owners or shareholders are not considered while recording and reporting the assets of the business entity.