Business Entity Concept (or Accounting Entity Assumption)

Accounting procedures are based on keeping a distinction between the business (as a registered organisation) and the proprietors. The accountant actually records transactions between the owner and the firm. When capital is provided by the owner, the owner is the creditor and the business firm is the debtor. The proprietor entrusts resources to the management; and the latter is expected to employ the resources to the best advantage of the firm and to account for them. How far the management has been successful with the task and credit assigned to it then becomes infer able. In the accounts books of the business, each transaction  is recorded from the viewpoint of the firm and not of the owner. The proprietor will be treated as creditor to the extent of his capital. This transaction will be recorded in the books of the firm by debiting cash account and crediting capital account. One logical extension of this concept is to lead to Responsibility Accounting  wherein transactions between departments can also be recorded. The effectiveness and efficiency of each department then become ascertainable.