Economic Entity Assumption
The concept that businesses exist separately from their owners, requiring separate accounting records and preventing commingling of personal and business finances.
Economic Entity Assumption
The accounting concept that a business exists as an entity separate from its owners, creditors, employees, and other businesses. This assumption allows for the clear delineation of the financial activities of the business from those of its stakeholders.
For example, a sole proprietor must keep personal expenses (home mortgage, personal vacations) separate from business expenses (office rent, business travel) when preparing financial statements for the business.
The economic entity assumption is fundamental to accounting regardless of legal structure. Even in sole proprietorships where legal separation doesn’t exist, maintaining separate records for business activities ensures accurate financial reporting and performance evaluation.