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In accounts, we distinguish between the business and its proprietors. Business is assumed to have distinct entity i.e., existence other than the existence of its proprietors and other business units. As an accountant, we are concerned with the business not the businessman. We have to i·ecord business transactions from firm’s point of view and never from the viewpoint of proprietors. We record transactions in the books of shop, establishment, factory, firm, company and enterprise and never in the books of proprietor, partners and shareholders. While making decisions regarding asset, liability, capital, revenue and expense, business viewpoint is taken into consideration.

The capital introduced by the proprietor in its own business is considered liability from business point of view. It will not b e a liability if proprietor’s viewpoint is taken. The logic behind treatment of capital as liability is that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties. It would have been a liability if the funds would have been borrowed from outside agency, then why not, if it is being invested by the proprietor himself. We also allow interest on capital to the proprietors because capital is supposed to be a liability. Interest on capital is an expense of the business; therefore, it will reduce the profit of the firm. It is at the same time proprietor’s claim against the business, so it will increase his capital. Amount withdrawn by the proprietor for personal use, known as drawings is assumed to be the assets of the business and at the same time a liability to the proprietor.

The business as a distinct entity records all business transactions into the books of Accounts and reports the result to the proprietor in case of sole trade, partners in case of partnership firms and shareholders in case of company. There is a legal divorce between the ownership and management of a company. The company is owned by shareholders but managed by the elected representatives of the shareholders i.e., directors. Accounts are prepared by the management and a copy of the financial statements- is· supplied to the shareholders, the owners of the company for information. Every accountant whether he is concerned with a petty shop or a firm or a company or a big business house will have to compulsorily adopt the concept of business entity in his accounting operations.

Legally, a sole proprietor or the partner of a partnership firm are not separate from their business units but in Accounting the business units are assumed to have distinct entity. Accounting entity is different from business entity. Accounting entity is wider term including business, clubs, institutions, public enterprises, local bodies and government, etc.