concepts helps in keeping business affairs free from the influence of personal affairs of the owners
Answers
Explanation:
Entity concept states that business enterprise is a separate identity apart from its owner. Accountants should treat a business as distinct from its owner. Business transactions are recorded in the business books of accounts and owner’s transactions in his personal books of accounts. The practice of distinguishing the affairs of the business from the personal affairs of the owners originated only in the early days of the double-entry book-keeping. This concept helps in keeping business affairs free from the influence of the personal affairs of the owner. This basic concept is applied to all the organizations whether sole proprietorship or partnership or corporate entities.
The failure to recognize the business as a separate accounting entity would make it extremely difficult to evaluate the performance of the business since the private transactions would get mixed with business transaction. The overall effect of adopting this concept is:
Only the business transactions are recorded and reported and not the personal transactions of the owners.
Income or profit is the property of the business unless distributed among the owners.
The personal assets of the owners or shareholders are not considered while recording and reporting the assets of the business entity.