Entity principle states that organization enterprise is a separate identity apart from its owner. Accountants ought to deal with an organization as distinct from its owner. Business transactions are tape-recorded in the business books of accounts and owner’s transactions in his personal books of accounts. The practice of identifying the affairs of the business from the individual affairs of the owners stemmed only in the early days of the double-entry book-keeping. This principle helps in keeping organization affairs free from the in uence of the individual affairs of the owner. This fundamental principle is used to all the companies whether sole proprietorship or collaboration or corporate entities.
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Entity Concept
Entity concept implies that the business is liable to the owner for capital investment made by the owner. Given that the owner invested capital, which is likewise called risk capital he has claim on the professional t of the business. A part of professional t which is apportioned to the owner and is right away payable becomes current liability in the case of corporate entities.
In Easy Words
Entity Principle– Service is different from its owner.
Example
Let us take an example. Expect Mr. Sahoo began business investing Rs100000 He bought items for Rs40000, Furnishings for Rs20000 and plant and equipment of Rs30000 Rs10000 stays in hand. These are the properties of the business and not of the owner. According to business entity principle Rs100000 will be dealt with by service as capital i.e. a liability of company towards the owner of business.
This withdrawal of cash/goods by the owner from the company is his private expense and not an expenditure of the business. Hence, the organization entity principle states that business and the owner are two separate/distinct persons. Appropriately, any expenses incurred by owner for himself or his household from business will be considered as expenses and it will be shown as drawings.
Impacts:
- Owner’s Capital is shown as a Liability in the Business
- Amount taken by Owner from company is recorded as Illustrations.
- Owner’s costs are not tape-recorded in the books of service and if payment is made from company, it is taped as Drawings.
- Proprietor can not use the bank account of organization for his personal transactions.
Service entity concept
When the owner invests money in the organization, it is tape-recorded as liability of the business to the owner. When the owner takes away from the business cash/goods for his/her personal usage, it is not dealt with as organization cost. Therefore, the accounting records are made in the books of accounts from the point of view of the business system and not the individual owning the business.
Significance
The following points highlight the significance of company entity idea:
- This principle helps in establishing the earnings of the company as just the company expenses and incomes are tape-recorded and all the personal and individual expenditures are overlooked.
- It also facilitates the recording and reporting of company transactions from the service point of view
- It is the really basis of accounting ideas, conventions and concepts.
Intext Concerns
Complete the blanks with suitable word/words
- ( iii) … … … … … principle presumes that organization enterprise and its owners are 2 different independent entities.
- ( iv) The products drawn from organization for owner’s individual usage are called … … … … …
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