Entity concept in accounting lights on the two unit in any organisation. One is business and second is the owner or owners of business. As per this accounting concept, we treat both units separately. We record only business related transactions. There are also lots of personal transactions of businessman. We leave it. If it
affects on the business, we record it .
In very simple words.
Importance of Entity Concept in Accounting
1. It is very important because with this, we can determine business's financial condition very correctly.
2. Business can operate without any fund shortage because we often see, if businessman or his wife or his children will take something from his business, it will decrease its capital. If businessman will not record all the drawing which is in cash or in kind, he will not manage to fulfill this capital shortage. One day, whole business will be empty. So, it is very necessary, every personal withdraw from business must be recorded. Only after businessman can deposit same amount through his generated profit.
3. Only after treating two separate parties, there will be benefit to the business because there are lots of personal expenses which are not related to business. Business will not record them. For example, businessman pays his personal home's lighting bill with his personal money. So, his business will not record this. But if businessman takes Rs. 5000 for paying his personal bill, then it must be recorded to show the correct outflow of cash.
Examples
A is doing the business of ready-made clothes. He has three children and one wife. Suppose, one day his wife came to his business shop. She wore the ready-made clothes to her children and went home without paying anything. These clothes cost was of Rs. 10000. Now, A will record this as her drawing. Because businessman is the receiver for personal use. So, A's drawing account will be debited. Because ready-made clothes of Rs. 10,000 went from business, so purchase account will be credited. We can not write the sale word because one is there is not any profit in it. Second it is not sale.
affects on the business, we record it .
In very simple words.
According to this concept, every business is separate from his owner of business. If businessman takes some money from business. Then it is just loan given by business to businessman. So, it is very necessary to record all transactions between business and businessman.
Importance of Entity Concept in Accounting
1. It is very important because with this, we can determine business's financial condition very correctly.
2. Business can operate without any fund shortage because we often see, if businessman or his wife or his children will take something from his business, it will decrease its capital. If businessman will not record all the drawing which is in cash or in kind, he will not manage to fulfill this capital shortage. One day, whole business will be empty. So, it is very necessary, every personal withdraw from business must be recorded. Only after businessman can deposit same amount through his generated profit.
3. Only after treating two separate parties, there will be benefit to the business because there are lots of personal expenses which are not related to business. Business will not record them. For example, businessman pays his personal home's lighting bill with his personal money. So, his business will not record this. But if businessman takes Rs. 5000 for paying his personal bill, then it must be recorded to show the correct outflow of cash.
Examples
A is doing the business of ready-made clothes. He has three children and one wife. Suppose, one day his wife came to his business shop. She wore the ready-made clothes to her children and went home without paying anything. These clothes cost was of Rs. 10000. Now, A will record this as her drawing. Because businessman is the receiver for personal use. So, A's drawing account will be debited. Because ready-made clothes of Rs. 10,000 went from business, so purchase account will be credited. We can not write the sale word because one is there is not any profit in it. Second it is not sale.
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