According to which concept the owner of the business is considered creditor of the business in accounting
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Hello,
Lets first clarify, Proprietor of a business is not a creditor, but an Owner who invests CAPITAL. A creditor supplies goods for credit, but this role is a non-fixed/ short-termed, i.e less than a year(though some long term debt providers are considered as Debt creditors, it does not qualify for the criterion prescribed )
Investopedia defines creditors as “A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. A business who provides supplies or services to a company or an individual and does not demand payment immediately is also considered a creditor, based on the fact that the client owes the business money for services already rendered.
So, an owner is not a debt provider in his own business.
Further speaking about the concept, it is , Business Entity Concept!
This concept specifies that, the transactions of the business should be separated from the ones of its owners(as they are considered outsiders) and that business itself is an entity!
Lets first clarify, Proprietor of a business is not a creditor, but an Owner who invests CAPITAL. A creditor supplies goods for credit, but this role is a non-fixed/ short-termed, i.e less than a year(though some long term debt providers are considered as Debt creditors, it does not qualify for the criterion prescribed )
Investopedia defines creditors as “A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. A business who provides supplies or services to a company or an individual and does not demand payment immediately is also considered a creditor, based on the fact that the client owes the business money for services already rendered.
So, an owner is not a debt provider in his own business.
Further speaking about the concept, it is , Business Entity Concept!
This concept specifies that, the transactions of the business should be separated from the ones of its owners(as they are considered outsiders) and that business itself is an entity!
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The idea of a corporate entity assumes that a company exists independently of its owners. It indicates that the business and its owners are to be recognised as two different entities for accounting reasons. Keeping this in mind, when a person invests money as capital in his firm, it is recorded as a liability of the business to the owner in accounting records.
One distinct entity (owner) is supposed to be giving money to another distinct entity in this scenario (business unit).
Similarly, any money taken out of the business for personal reasons (drawings) is viewed as a reduction in the owner's capital and, as a result, a reduction in the business's liabilities.
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