Business entity concept, Accounting Basics

In accounting we create a distinction between business and the owner. All the records are maintained from the viewpoint of the business, quite than from that of the owner. An enterprise is an economic section, separate and apart from the owner or only owners. Since that transactions of the business and those of the owners must be accounted for, and reported separately. During recording a transaction, the significant question is how does it influence the business? For illustration, if the owner of a shop were to take cash from the cash box for meeting specific personal expenditure, the accounts would demonstrate that cash had been reduced even while it does not create any dissimilarity to the owner himself. Likewise, if the owner puts cash in the business, he has a claim against the business for capital brought in.

This distinction can be simply maintained in the case of a restricted company as a company has a legal entity or personality of its own. As a human being, this can engage itself in economic activities of owning, producing, lending, managing, storing, transferring, consuming and borrowing commodities and services. Distinction, though, is complicated in the case of partnership, and even extra thus in the condition of a one-man business. Even so, accounting still keeps separation of business and owner. It implies that, owner's personal and household expenses or obligations (for illustration: expenditure on food, clothing, mortgages, entertainment, housing, debts, etc.) will not show in the books of account. This may be clarified as it is only for accounting reasons that partnerships and sole proprietorships are reacted as divide and apart from the owners while the law does not make that a distinction. A creditor would be justified inside looking to both the business assets and the private estate of the owner for satisfaction of his claim. One purpose for this distinction is to make this possible for the owners to contain an account of the performance from those who manage the enterprise. The managers are entrusted along with funds supplied through owners, banks and the others; they are liable for the proper utilization of the funds. The financial accounting reports are made to show how well this liability has been discharged.

Posted Date: 4/2/2013 7:06:22 AM | Location : United States

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