Why does the accountant use the business entity concept? And, When is the going-concern assumption not...

Why does the accountant use the business entity concept? And, When is the going-concern assumption not to be used?

Expert Solution

As per Business entity concept the transaction of the owner and business are two separate things. Hence the personal transactions of the owner should not be accounted as business transactions in the books of account. For example: Purchase of fixed assets for personal purpose should not be accounted as fixed assets in the business. It should be accounted as drawings by the proprietor. Thus it gives separate identity to the business from the personal transactions of the owner of the business.

As per going concern assumption it is presumed the entities will continue business for the foreseeable future and there is no intention to wind up the business in the near future. However when there are signs of entity winding up the going concern should not be used. For example: The entity is having negative net worth, entity has filed a petition for liquidation or insolvency proceedings are initiated by the lenders to the firm.

ekkarill92 answered 1 year ago

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