Accounting Entity

What is Accounting Entity?

Accounting entity is a separate unit to which certain accounting information is associated to aids. The nature of those accounting information distinguish one economic unit from other units with diverse economic activities.

When is Accounting Entity required?

Accounting entity is required any time there is a business transaction that has a financial implication touching the business perspective.It is required to mitigate the agency conflict between the owner and the business itself. This is because according to Jensen & Meckling (1976) each party wants to serve his own interest and this may result to the owner(s) misusing assets, capital or liabilities of the business

Example of an Acounting Entity

Suppose A, B and C start a business by the name ABC ltd. Then, before the eyes of law, A, B and C and the ABC ltd are two separate accounting entities and each can own property in their own name(s), can sue and can be sued in their capacity and can also enter in to contract in their independent capacity. A, B and C are termed as natural persons while ABC ltd, although using similar name to the owners taken jointly, is an artificial persons.

 

A, B and C purchased one motor vehicle each for $20,000

ABC ltd also purchased three motor vehicles each for $20,000

Conclusion; the transactions for the owners and for the ABC ltd will be recorded in separate books of accounts