Every economic unit, regardless of its legal form of existence, is treated as a separate entity from parties having economic interest is
Answer Details
The entity concept is a fundamental principle of accounting that assumes that every economic unit, regardless of its legal form of existence, is treated as a separate entity from parties having an economic interest. This means that a business is viewed as a distinct entity separate from its owners, shareholders, creditors, or any other parties with an economic interest in the business.
Under the entity concept, the financial transactions of the business are recorded separately from those of the owner or other parties. This enables the business to track its financial performance and position accurately, and to prepare financial statements that are useful for decision-making.
For example, if a business owner invests $10,000 of personal funds into the business, the entity concept requires that the transaction be recorded as a liability owed to the owner by the business. Similarly, if the business borrows $5,000 from a bank, the loan is recorded as a liability owed to the bank by the business.
By treating the business as a separate entity, the entity concept enables stakeholders to evaluate the financial performance of the business without confusion or distortion caused by mixing personal transactions with business transactions.