Explain business entity concept, Accounting Basics

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Q. Explain business entity concept?

Suppose for instance that you own two businesses 1) a physical fitness centre and 2) a horse stable. As per to the business entity concept you would consider every business as an independent business unit. Therefore you would normally keep separate accounting records for each one business. Currently when first studying any discipline students encounter new terms. Generally these terms are set in bold. The boldface colour terms are as well listed and defined at the end of each chapter. Suppose your physical fitness centre is unprofitable because you aren't charging sufficient for the use of your exercise equipment. You can determine this fact for the reason that you are treating your physical fitness centre and horse stable as two separate business entities. You must as well keep your personal financial activities separate from your two businesses. Thus you can't include the car you drive only for personal use as a business activity of your physical fitness centre or your horse stable. but the use of your truck to pick up feed for your horse stable is a business activity of your horse stable.

As you will see in a while the business entity concept applies to the three forms of businesses- partnerships, single proprietorships and corporations. Therefore for accounting purposes all three business forms are separate from other business entities and from their owner(s). Since mainly large businesses are corporations we use the corporate approach in this text and include only a brief discussion of single proprietorships and partnerships.


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