The Business Concepts Of Accounting
Accounting is based on a number of assumptions. Business entity is one of the most important concepts.
The concept of separate entity, or economic entity, is a concept that states the business and its owner are two distinct parties. The only transactions that are recorded in the accounts will be those which have an impact on the business. All other events not affecting the business aren’t recorded. This means that accounting records must be made with the business in mind and not the owner.
Personal resources can only affect the financial records of an enterprise when the owner adds new capital to the company or withdraws money from it.
This is why separate accounting records are needed to exclude assets and liabilities for any other company or its owner. This concept can be very useful because it prevents the use of information if the owners and the business transactions are combined.
Business can be organized in a variety of ways, including sole proprietorships and partnerships, corporations, companies etc. Although the levels of control that owners exercise may vary, each of these forms keeps separate records. Business entity concept applies to any type of business even if it is not recognized by a particular law as a two-entity system.
This concept is essential for the preparation of financial reports.
Accounting firms can examine separate businesses regardless of ownership status.
Each transaction should be assigned an entity.
It is important to separate the profitability of the business from the cash flow.
This tool helps you to determine the current financial state of your business.
Auditing the books of business is convenient.
This ensures that businesses are taxed separately.
Calculate the payouts for the different owners when the business is liquidated.
In terms of liability, it is important to determine what assets are available in case a court judgment was rendered against the company.
Comparing its financial performance to that of similar businesses within the same industry.