Question

Describe the accounting concept that would be relevant when deciding on how to account for a transaction, which involves an owner of a business taking goods for his own use.

Answer 1

Entity concept: Entity concept states that business enterprise is a separate identity apart from its owner.
Accountants should treat a business as distinct from its owner. Business transactions are recorded in the
business books of accounts and owner’s transactions in his personal books of accounts. The practice of
distinguishing the affairs of the business from the personal affairs of the owners originated only in the
early days of the double-entry book-keeping. This concept helps in keeping business affairs free from
the influence of the personal affairs of the owner. This basic concept is applied to all the organizations
whether sole proprietorship or partnership or corporate entities.

Entity concept means that the enterprise is liable to the owner for capital investment made by the
owner. Since the owner invested capital, which is also called risk capital, he has claim on the profit
of the enterprise. A portion of profit which is apportioned to the owner and is immediately payable
becomes current liability in the case of corporate entities.

For example,

Mr.A started business investing $500,000, it means that the enterprise owes $500,000 to Mr.A. Now Mr.A spends $5,000 to meet his personal expenses from the business fund, then it should not be taken as business expenses and would be charged to his capital account.