Principles of Accounting- Separate Entity Concept

Principles of Accounting- Concept

• Definition: Accounting principle refers to common rules or guidelines for accounting financial transactions and preparing financial statements.
  • Accounting principles are the foundational guidelines for recording and preparing financial statements.
  • The accounting principles are commonly referred to as ‘Generally Accepted Accounting Principles’ (GAAP).
  • The regulators and authorities of each country have their own accounting principles like UK GAAP, USA GAAP, IFRS, etc.
• Accounting Principles in India: financial statements in India are prepared on the basis of accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the law laid down in the respective applicable acts (for example, Schedule III to Companies Act, 2013).
• Goal of accounting principles: to ensure that a company’s financial statements are complete, consistent, and comparable.
  • Accounting standards are implemented to improve the quality of financial information reported by companies.
• Importance of Accounting Principles:
  • Makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time.
  • Facilitates the comparison of financial information across different companies.
  • Help mitigate accounting fraud by increasing transparency and allowing red flags to be identified.
  • There are many principles of accounting. Today, we are going to discuss the Principle of Accounting Entity (Separate Entity Concept).

Accounting Principles- Accounting Entity (Separate Entity Concept)

• Principle of Accounting Entity (Separate Entity Concept): According to this principle, a business is treated as an entity that is separate and distinct from its owners.
• Features of Accounting Entity (Separate Entity Concept): It assumes that a business has its own identity distinct from the owners, creditors, debtors, managers, and others.
  • Keeping in view of this assumption, business transactions are recorded in the books of accounts from the point of view of business enterprise and personal transactions of the owner are not included in the business transactions.
  • Also, the assets and liabilities of the owners are set aside in the preparation of financial statements of the business enterprise.
  • Business entity assumption is applicable to all types of business organizations viz. sole proprietorship, partnership firms, companies, etc.
• Limitation of the principle of Accounting Entity:
  • Drawing a line of separation between the owner and the business is very thin in the case of sole proprietorship and partnership, but not so in the case of companies.
  • Sometimes it becomes very difficult to differentiate between personal expenses and business expenses. For example, use of a personal car for the purpose of business or use of the official phone for personal purposes, etc.

Fill this form to get free Study Material of UPSC ESIC Deputy Director