An entity is something that maintains a separate existence. In business, an entity is an organizational structure that has its own goals, processes, and records. Examples of entities are:
- A sole proprietorship
- A partnership
- A corporation
These entities all have names that may differ from the names of their owners. The entities may independently own assets and incur obligations, though some entity structures (such as the sole proprietorship and some forms of a partnership) may allow owners to also be liable for the obligations of their business entities. An entity may also be required to submit tax returns and pay governments for their income earned.
In accounting, transactions are recorded and financial statements are produced for a specific entity. There is not supposed to be any intermingling between the affairs of investors and the business conducted by an entity that they own.
Examples
- A CPA has 3 rooms in a house he has rented for $3,000 per month. He has set up a single-member accounting practice and uses one room for the purpose. Under the business entity concept, only 1/3rd of the rent or $1,000 should be charged to business, because the other 2 rooms or $2,000 worth of rent is expended for personal purposes.
- The CPA received $900 bill for utilities. He paid the whole amount using his business account. $600 is to be considered a withdrawal because only $300 (1/3rd) related to business and the other $600 was for the domestic purpose.
- Assuming each public accounting entity business is required to pay $100 to a local association of CPAs each month. If the CPA pays that amount from a personal bank account the amount shall be considered additional capital.
