Before you speak accounting you need to identify who or what you are speaking accounting for – a concept in accounting referred to as economic entity assumption. An economic (business) entity is an organization that stands apart from other entities. We draw boundaries around each entity to keep its affairs distinct from those of other entities.
Basically an entity refers to one business, separate from its owners – who themselves are seen as separate economic entities in the personal capacity. All economic events relating to a specific entity are recorded in the accounting records of that entity; economic events not relating to that entity are excluded.
Most entities are defined legally, ie by law – for example, companies registered in terms of a country’s corporate laws. In terms of most countries corporate laws, a company is a legal person and is therefore an independent entity. Common types of economic entities are the sole trader, partnership and company.
An accounting entity does not necessarily have to be an acknowledged legal entity or corporate entity with a profit motive. Your local community school, religious organization, sports club or book club could also represent an economic entity.
You start an online business selling gifts. You open a bank account for your business and deposit CU10,000 into this bank account so that your business can purchase its first items for sale, including a range of hoodies.
Following the economic entity assumption, the deposit into your business account of CU10,000 is recorded separately from your personal assets, such as your own clothing. To mix the CU10,000 of business cash with your personal assets would make it difficult to measure the success of your business. The economic entity assumption requires that each entity be separate from other businesses and from the owners.