Business Entity Concept GAAP
Here we discuss about Business
Entity Concept that is one of the Accounting Concepts and it is included in the Generally Accepted Accounting Principles
(GAAP).
Under this concept, the business
must be regarded as Separate Legal Entity and it is separated from its owners.
All the Business Transactions are recorded from the point view of business and not from the
point view of owners. All the personal transactions of the owners of the business must be separated from the business. For example, if a sole owner invest Rs. 300000 in the business, then this amount invested is a Capital Account recorded in the book of company's business but if the owner withdraws Rs. 10000 for his personal use, then it has not concerned with the business and it (Drawings) is deducted from the capital of the business.
Personal transactions of the Sole Owner or Proprietor or
Entrepreneur are recorded separately and record only if it affects the
business. For Example an automobile owner buys or sells car online or offline
for his / her personal use and does not withdraw or take cash from his / her
business, then this business transaction does not record in the books of
accounts of the business as this transaction does not affect the business. But
if, for instance, he / she invest cash in the business, then
it affects the business and we record the transaction by following Generally
Accepted Accounting Principles (GAAP) and Other Accounting Principles according
to Accounting rules and regulations.Significance / Importance of Business Entity Concept
1. Since, Business Entity Concept separates the business and business owners and other parties interested in the business, therefore no parties can influence the business gain his own
advantages. So, it ensures Objectivity And Reliability Principle.
2. As under this concept, all the contracts are created on the behalf and with the name of business and all business transactions are recorded in the Books of Accounts of business, so
it ensures that all employees, business owners and management are responsible to pay them according to Business’s terms and conditions and not get any advantage or gain or own benefits under the law.
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