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Business Entity Concept

Business Entity Concept. General Overview. Business entity concept provides that the accounting for a business or organizatio n be kept separate from the personal affairs of its owners , or from any other business or organization. How this affects Business.

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Business Entity Concept

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  1. Business Entity Concept

  2. General Overview • Business entity concept provides that the accounting for a business or organization be kept separate from the personal affairs of its owners , or from any other business or organization.

  3. How this affects Business • The business entity concept ensures a more accurate representation of a companies financial condition. • The concept is also key to the preparation of financial statements.

  4. If the owner takes cash out of the company it is recorded as drawings. If the owner invests money it is recorded as capital. • It is not possible to audit the records of a business if the records have been combined with those of other entities and/or individuals

  5. How this affects businesses on different levels • your business may take one of four structures : sole proprietorship, partnership, corporation, or cooperative. Regardless of which structure, the owner accounts must be kept out of the businesses accounts.

  6. Sole trader • In order for owners to withdrawal money for personal use from their companies, a transaction occurs . It appears in the ledger as a “drawing expense”. On an accountant’s perspective the business is giving away money, and the owner is receiving money.

  7. Example • John rents four rooms in a house for $4000 a month. His brother lives in one of the rooms, John lives in another room and two of the rooms are used for his advertising company. • Under the business entity concept, how much money of the rent is added to his advertising company? • $2000 is added to the advertising company. Half of the rooms being rented by John is used for his company, therefore half of the money comes from his company.

  8. Example • John receives a $200 electricity bill for his four rented rooms. He pays the $200 from his business, claiming it as an electrical expense. • Under the business entity concept is this correct? • No. Half of the $200 is actually personal and not his business. Therefore, if he was to pay the $200 from his business account half of the money would go under drawings because it was used for personal reasons and the other $100 would go under electrical expenses.

  9. Speed matching Game

  10. Rules: • Class must divide into groups • There will be two different rounds • For each round, each group will get a set of questions , face down on their desk. At the same time, three answers will appear on the board. • When the groups are told to do so, they can flip over the questions. • Groups have to match each question with the proper answer. • The first group to finish wins.

  11. Round 1 answers • $80 • $0 • $40

  12. Round 2 Answers • $0 • $50 • $1040

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