According to the business entity concept, a business may be a separate entity from its owners. This basically means personal transactions of the owners of the business are to be treated separately from the business transactions. While preparing accounts of any sort of organization be it Sole Proprietorship, Partnership, Company, etc. we have to always treat the private transactions of the owner as a break away from the business transactions.
Mr. A, a lawyer has 5 rooms in his house, which he has rented for Rs 50,000 per month. He decided to start his own practice for which he decided to use one of the rooms. consistent with the business entity concept, only 1/5th of the rent i.e. Rs 10,000 should be charged to business, as the other 4 rooms are used for personal purposes.
Mr. A has got to pay membership fees of Rs 1,000 per month to the Bar Council of India; he paid the same through his personal account. In such a situation an equivalent has to be considered as his additional capital.
Mr. A received a phone bill of Rs 2,500. The full amount was paid through his business account. Rs 2,000 are considered as drawings as only Rs 500 (1/5th) is related to his business and the remaining Rs 2,000 is for his personal reasons.
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According to The American Institute of Certified Public Accountants “Principles of Accounting are the overall law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”
After going through this lesson, you will be ready to understand the ‘Basic Accounting Terms’ that we commonly use in Accountancy.
After browsing this lesson, you shall be ready to understand the subsequent Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual