Business Entity Accounting Principle or Concept

May 13th, 2006 Comments off
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BUSINESS ENTITY ACCOUNTING PRINCIPLE OR CONCEPT

·  Owner separate from the business

·  Company has a separate existence

·  Affairs of the owners separate from the business

NOTES:

By understanding this concept, we then realized that all the financial data will only be related directly to the activities of the business. The business is a separate “animal” by itself. It’s run by a professional board of directors who is responsible and accountable for the every day’s running of the business.

ILLUSTRATION NO.1

Say, a minority shareholder who held shares in listed Company ABC has recently been made bankrupt.Question: Do you think that his bankruptcy will affect the financial health or activities of the company?Answer: Basing on this business entity concept, the affairs of the shareholder has nothing to do with the company.

ILLUSTRATION NO.2

Assuming the shareholder Mr. X of Company ABC owns personal assets of five Porsche, five bungalows and expensive arts.
Question: Do you take up these personal assets belong to Mr. X into the books of Company ABC?Answer: The answer is NO, the personal assets of the shareholder has nothing to do with the company.
ILLUSTRATION NO. 3
Applying to the same company ABC, you read in the financial statement that its ultimate holding company is Company ZZZ. Therefore don’t be surprised that company ABC as an entity can also be part of a larger business entity which is company ZZZ.
Also, Company ZZZ might have many business unit operating units/entities like company ABC

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Financial Accounting

 
 

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