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Wednesday 16 March 2011

Accounting principles and Policies

1. Separate Entity Concept or Business Entity Concept:

According to this concept, business and businessman, both should be treated as separate entities at the time of recording transactions in the books of business. This concept makes it possible-

Account Books in Name of Business Entity
Records only Transactions of Business Entity
Not to record the private transactions of business in the books of business,
Recorded from View-Point of Business
To record the transactions between businessman and business
To present the true fair view of the business affairs.

Why this concept?
Thus, if this concept is not followed, then the private transactions of the proprietor will be mixed up with the transactions of business and then, the true and fair position of the business could not be known. That is why, when one person invests Rs. 1,00,000 into business, it is deemed that the proprietor has given that amount to the business and therefore, this amount is shown as a liability in the books of the business. In case, the proprietor withdraws Rs. 20,000 from the business, it will be charged to him and therefore, the net amount payable by the businessman will be shown as Rs. 80,000.

Confliction with law:
The concept of separate entity is applicable to all forms of business organizations. The relationship, created by law between business and businessman, should not be taken into consideration at the time of recording transaction. For example, in case of a partnership business or in case of a sole proprietorship business, the partners or sole proprietor are not considered as separate entities in the eyes of law, but for accounting purposes they will considered as separate entities.

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