Accounting Concepts

Accountancy is based on some very basic Accounting Concepts and they are the underlying logic of the profession.

The Entity Concept
This means regarding the business as a separate entity, distinct from its owners of managers. This concept applies whether the business is a limited company (which is then, in law, a separate entity) or a sole proprietorship or partnership (which isn’t legally a separate entity).

Therefore, if a sole trader pays money to the business bank account, the money becomes a business asset but legally it remains a personal asset.

If Jo Bloggs has a business selling widgets, and she gives two away as presents, the correct accounting treatment is to regard her as having purchased the widgets from the business. The subsequent gift is a private transaction and is not recorded anywhere in the books of the business.

The reason behind this is so that the business’s financial position is not hidden behind the personal transactions. For instance, banks and other lenders don’t want to have to wade through all your weekly shopping bills in order to see if your business is making a profit.

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