Accountancy · Ch 1 — Introduction to Accounting
Entity
Entity
The Entity Concept
Accounting is never done in a vacuum. Every set of books belongs to someone — a specific business, a particular firm, a named company. This is the core of the Entity Concept.
An entity is simply a reality that has a definite, individual existence. In accounting, we narrow this down to a business entity — a specifically identifiable business enterprise. Think of Super Bazaar, Hire Jewellers, or ITC Limited. Each is a distinct business entity.
The accounting system is always devised for one specific business entity. This is also called the accounting entity.
The Entity Concept means that for accounting purposes, the business is treated as a separate person, distinct from its owner(s). The owner's personal assets, liabilities, income, and expenses are never mixed with those of the business.
This separation is the foundation of double-entry bookkeeping. Because the business is a separate entity, it can have transactions with its owner. When the owner puts money into the business, the business owes that amount to the owner — it is a liability of the business, called Capital. When the owner takes money out for personal use, it is a reduction of that liability, called Drawings.
The accounting treatment follows directly:
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Owner brings in capital: The business receives cash (asset increases). The business now owes the owner that amount (liability increases).
Journal entry: Debit Cash Account, Credit Capital Account.
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Owner withdraws for personal use: The business gives cash to the owner (asset decreases). The owner's claim on the business reduces (liability decreases).
Journal entry: Debit Drawings Account, Credit Cash Account. …