1.2.1 Business Entity

The business entity assumption means a business entity should be accounted separately from other business entities, including its owner. The business entity here is a unit which has independence or relative independence in management or economy. It’s also an economic unit stands on its own interest.

For example, David owns a grocery store, a farm, and other personal assets. When we try to measure the performance of the grocery store in making profit, the grocery store should be measured as an independent economic entity and accounted separately from the farm and David’s other personal assets.

As the basic premise of accounting, it’s of great significance to identify the business entity. Firstly,business entity assumption helps to define the spacial scale of accounting. It requires that the accounting records and financial statements involve only the economic activities of the enterprise itself, but not the economic activities of its owner or creditor, or that of other enterprises or business entities. Secondly, this assumption defines the scope of economic business activities and events that need to be treated by the accounting. Only those activities or events that influence the economic interest of the business entity should be reflected and recorded. And only by this way, could the financial position, operating results, and cash flows of the enterprise be correctly reflected, and could the useful accounting information be obtained by the owners, creditors, and other stakeholders of the enterprise.

It should be pointed out that business entity is different from legal entity. The latter refers to the legal subject that has registered in relevant government offices, owns independent properties, and could undertake civil responsibilities. Generally speaking, a legal entity must be a business entity, but a business entity is not always a legal entity. A business entity could be a legal entity and it also could be a non-legal entity. It can be the whole enterprise; and can also be an internal unit of the enterprise, such as a branch. It can be a single company; and can also be a group company or an affiliated enterprise which is organized by the holding relationship.