Separate Entity Concept & Going Concern Concept

 

Separate Entity or Business Entity Concept:

Do you know what the separate entity/business entity concept means? Hopefully, you will have a better understanding after reading this article.

 I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

Today’s we are going to discuss what is the business entity or separate entity concept.

First of all, there are a number of concepts or rules of accounting. They are well known and referred to by many as accounting concepts. These concepts and rules are fundamental in preparing the final accounts of an entity. And even to a certain extent, the accounting concepts help to make the final accounts relevant and reliable to its users.

The business entity concept expresses from an accounting perspective that, the business is regarded as being separate from the owner or owners. Or in other words, the business has a totally separate identity from its owners. The concept is applied to the accounts of a business. More specifically, the concept can refer to the process of recording and reporting the final accounts.

Additionally, the business entity concept also distinguishes that the finals accounts of a business should only include the activities and transactions of the business. It also states that the accounts do not include the personal activities, transactions, or even the personal assets and liabilities of individuals who own or run the business. However, there is one exception to this rule. The accounting records of a business will only be affected by the owner or owners when they introduce new capital to the business or take drawings out of the business.

Let’s give an example to illustrate the concept.

Mick the owner of a grocery shop took some flour and milk from the shop stock for his wife to make some cakes. Initially, we have to identify who is the owner or owners and who is the business. In this case, Mick is the owner of the shop and the grocery shop is the business. Now we have to identify what has happened and, if we need to, how to treat it in the accounts. So, Mick has taken some stock from the business for personal use. Therefore, because the owner has withdrawn stock from the business for personal use, in the business accounts, the stock will decrease and drawings of the owner or Mick will increase. Therefore, by applying the business entity concept, the business and owner have been treated as separate entities. So that is the explanation of the business entity concept.

The Separate entity concept states that we should always separately record the transactions of a business and its owners. An owner cannot extend funds to a business without recording it as either a loan or a stock purchase. For example in the case of a sole proprietorship or partnership business, though the sole proprietor or partners are not considered as separate in the eyes of law, for accounting purposes they will be considered as separate entities.

Going Concern Concept:

Do you know what the going concern concept means? Hopefully you will have a better understanding after reading this article.

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

Today’s we are going to discuss what is the going concern concept.

You should first know that there are several concepts or rules of accounting. They are well known to many as the accounting concepts. These concepts and rules are essential when preparing the final accounts of an entity. The accounting concepts also assist to make the final accounts relevant and reliable to its users.

The going concern concept illustrates that, in general, it should be assumed that the business of the prepared final accounts is in a healthy and stable condition. The concept also presumes that the business will continue to trade and be active in the foreseeable future. In other words, the concept presumes that the accounts are made because there is a high probability that the business is still going to trade in the next few years or business periods. It is also assumed that the business has no intention to significantly reduce the size of the business itself or to liquidate in the short term. In some cases, however, if a business was not a going concern, this would mean that the assets of the business maybe worth a lot less. In more depth, the market value of the assets maybe worth considerably lower compared to their value in the accounts and financial statements. Due to this, the business will need to make a statement in the accounts stating the situation.

Let’s give an example to demonstrate the concept.

Bill plc is about to released its annual final accounts. Although Bill plc has made a profit for the trading period, the balance sheet of the business has debts that are significantly higher compared to the assets and other possessions it has. What statement should the business make in the accounts about the going concern?

Bill plc should follow and apply the going concern concept. Due to the current situation Bill plc will need to make a statement in the final accounts stating that the business may not be a going concern. This is because the business may find it extremely difficult to pay the debts in the short term. Therefore, it could be said that the business could find it hard to trade in the foreseeable future, especially if it had to pay back short-term debts. This is mainly due to the business debts being greater than the business assets.

 So that is the definition of the going concern concept.

A Going Concern is a business that is assumed will meet is financial obligations when they fall due. It functions without the threat of liquidation for the forseeable future, which is usually regarded as atleast the next 12 months for the specified accounting period:

Watch the video for detailed discussion: