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Concept of Business Entities

Financial accounting is based on the premise that transactions and balances of business entities must be accounted for separately from their owners. Business entities are therefore considered different from their owners for accounting purposes.

Therefore, any personal expenses by the business owner will not appear in the entity's financial statements. Likewise, if the owner's personal costs are paid from the entity's assets, it will be considered as drawing, for accounting to be considered the same as taking cash. The concept of a business entity also explains why owner's equity appears on the side of balance sheet liabilities (i.e. the credit side).


The share capital contributed by a businessman to his business, for example, is a form of liability (known as equity) 'business' which is a business debt to its owner. Because it is actually a liability, that is why it is presented on the credit balance sheet side.

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