Business Entity concept implies that the buying, selling or any other transactions ancillary to the business must be captured in the books of accounts, separately from that of the proprietorâ€™s personal transactions. It emphasizes on the fact that a business is distinct from its owner and that it is a separate entity.
No matter what the nature of business is and what the category of entity it is, it has its own set of transactions and events. As a matter of fact, even the business and the owner can have transactions among themselves although ultimately it is the owner who is running and controlling the business. In case you have doubts in regards to understanding basic concepts of this subject, you can get to the core by checking out manuals as business entity concept homework answers.
The entity incurs its own liabilities and owns its own assets. The amount or sum contributed by the owner is the capital of the business. By virtue of this particular concept, the owner is a long term creditor to the business.
When the firm is wound off the capital is expected to be returned to the owner.Â Business Entity is a principle which is largely followed in the field of accountancy. The accounting entries are made keeping in view of the fact that owner is different from business.
If the transactions of the business and the owners or owner are intertwined and not treated separately a number of chaotic circumstances could develop. It would be virtually impossible to manage the business.
Following are few of the reasons why this concept is followed in accounting:-
While solving business entity concept homework answers, students may across the term notional rent. Sometimes the owner carries on the business activity in his personally owned premises. It could be a showroom, warehouse or a factory and even office rooms. In that case, the business actually does not have to pay any rent to the owner as it would have been the situation if the owner did not own that particular house property.
Despite the fact that no actual rent is paid to the proprietor, a notional rent is charged to the profit of the business and credited to the account of the owner. This is an ideal example where the business entity principle is followed.
The notional rent is a notional income of the proprietor, and it is he who will be paying the taxes on such income and not the business. The profit is also correctly reflected. This notional rent is an expense for the business and a source of income for the person running the business and providing the premises.
Business Entity Concept is not only a theoretical term or concept. In the practical life scenario business organizations abide by this principle while calculating income expenditure profit or loss of the business.
Having some idea about actual examples would bring ease while taking up business entity concept homework answers.
Few instances where this notion is applicable are:-
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