Business Entity Concept            

In accounting, business is considered to have a separate existence from that of its proprietors or owners. It implies that a distinction between the economic activities of the enterprise and that of the owners is to be maintained. All the transactions and the events are analyzed and recorded in the books from the point of view of the business enterprise. This concept ensures that accounting records only reflect the economic activities of business and not that of its owners. This concept is applied to all forms of business enterprises such as sole proprietorship concerns, partnership concerns, and joint stock companies. However, in India a separate entity is recognized under Law only in the case of corporate entities. This concept has its genesis in the fact that a business entity is considered as a separate entity with its own identity, separate from its members.

This concept helps the business to maintain its affairs strictly free from the private affairs of its proprietors. Thus, when capital is invested by owners into the business (say Rs.1,00,000), the business considers the money it received from the owners as money lent by the owners. Therefore, as money is due to the owners it  is shown as a 'liability' in the books of the business. When the proprietor withdraws some amount (say Rs.10,000) from the business it is treated as money repaid. Therefore, it is charged to him and deduction in the form of drawings is made and only the net amount due i.e., Rs.90,000 (Rs.1,00,000 - Rs.10,000) by the business is shown as 'liability'.

Owing to the fuzzy relation between the legal entity of a sole proprietary concern and its sole proprietor, the proprietor usually may not pay himself a salary, even when he works for his business. However, since the business is an accounting entity, his position as a owner must not come in the way of drawing a salary (even though not actually paid) from the business for the services rendered by him. This is because as far as the business is concerned, it is immaterial whether the service is rendered by the owner or an outsider. Both being workers, the services rendered cannot be therefore regarded as cost free. The reward of ownership is manifested only in the form of profit, which must be arrived at after charging 'all costs'.