Entity Concept
The accounting principle establishing a business as a distinct economic unit, separate from its owners and other entities, for financial reporting purposes.
Entity Concept
The accounting principle that establishes a business as a distinct economic unit for accounting purposes, separate from its owners, other businesses, and other economic entities.
For instance, when the owner of a small bakery takes cash from the business for personal use, this is recorded as an owner’s withdrawal rather than a business expense, preserving the separation between personal and business finances.
The entity concept is essential for producing meaningful financial statements that reflect only the activities, assets, and liabilities relevant to the specific business. It provides the foundation for analyzing business performance independent of owners’ personal affairs or related entities.