We draw boundaries around each entity so as not to confuse its affairs with those of other entities (Horned/Harrison-Accounting Chapters 1-17, page 9). There is so much information available about any entity that accountants start by determining what an entity is. The data collected are restricted to that of the entity itself. This sometimes very difficult, especially in small entities where there is often no clear distinction between the public affairs of the entity and the private affairs of the owner.
In a profit-making business, for example the owners sometimes change their household expenditure to the business or use their private bank count to pay for goods and services meant for the business. They have then to establish exactly what the business owes the owner and what the owner owes the business. The accountants will, however, only interested in recording in the books of the business the effect these various transactions have on the business: they are not interested in effect that they have on the owner’s private affairs.
Indeed, it would be an entirely different exercise if the accountants were to deal with the owner’s private affairs. This would mean that they were accounting for two different entities-one private and one public-although there may be a great deal of overlap between them (John R. Tyson-Accounting for Non-Accounting Students, page 27). What is Financial Statements? The financial Statements are the: 1. Income statement 2. Statement of Owner’s Equity 3. Balance Sheet 4. Statement of Cash flow Importance of Accounting Concept to preparing Financial Statements The Entity Concept Consider Sherman Lawn Service.
Assume Hag Sherman started the business tit $500 obtained from a bank loan. Following the entity concept, Sherman would account for the $500 separately from his personal assets, such as his clothing and automobile. To mix $500 of the business cash with his personal assets would make it difficult to measure the success or failure of Sherman Lawn Service. Consider Toyota, a huge organization with several divisions. Toyota management evaluates each division as a separate entity. If Lexus sales are dropping, Toyota can find out why.