Accounting Concepts- Business Entity

What is business entity?

Business entity is the accounting convention which states that the owner's financial affairs must be kept separate from the business.

The business is a separate entity from the owner, which means even if the business consists of no one but the sole owner, the money that he puts into it is considered capital.

It also means that the owner cannot just take goods sold in the business for his own consumption. This, along with cash withdrawals are all known as 'drawings'.

When we talk about capital we define it as the amount of money the business owes the owner. Similarly, when we talk about the company's net assets, the value of total assets less total liabilities is = capital. Which means when the business sells all its assets, and pays off all its liabilities the money left over, if any, will go to the owner.