Why Do Start-ups Fail After Receiving Funding?
It is common knowledge in the investing world that almost 90% of the start-up companies which come into existence shut down within the first couple of years. However, it is also assumed that if a company is able to gain funding from professional investors, its chances of surviving become astronomically high. This is because it […]
Role of Investment Bankers in Derivatives Market
The derivatives department is a highly specialized department in the modern-day investment bank. This is because, in terms of size, the derivatives department easily dwarfs all other departments in the investment bank. For instance, the worldwide market for derivative contracts is said to be valued at $79 trillion! This is definitely a notional value since […]
Introduction to Cash Flow Ratios
Once upon a time, investors and analysts used to believe in ratios that have been calculated based on the earnings that the company has stated in the Income Statement. Alas! That was once upon a time. Of late, there have been a huge number of frauds and malpractices that have come to the fore. All […]
Banking as a Service
Technological innovations are having a huge impact on the commercial banking industry. Many parts of the commercial banking business are being completely transformed. For instance, earlier commercial banks used to own the entire banking value chain. However, of late, this has changed. Commercial banks now coordinate with a wide variety of financial and non-financial entities […]
History of Corporate Taxation
In 2019, President Donald Trump created outrage when he decided to lower the tax rates of corporations. Donald Trump was of the opinion that high corporate tax rates in the United States are making domestic companies uncompetitive. As a result, companies are choosing to incorporate out of America. Donald Trump enacted a law that allowed […]
The entity concept is one of the central tenets of accounting. An understanding of the same is therefore of paramount importance to students. However, the entity concept came as a solution to a problem faced by earlier accountants. To understand the benefits of the solution provided, we must look at the problem first.
In reality a business is just another aspect of a person’s life. When many people get together and start a business, it is their collective effort. However, this can cause confusion for the accountants. Imagine accounting for personal and business expenses together. The accountants would never be able to come to an accurate picture of profits.
To solve this problem, accountants created the entity concept. This was the separation of personal and professional concerns of the entrepreneur. For the purpose of accounting, the business is considered to be an entity which is independent and separate from its entrepreneur.
The separation of concerns in accounting is irrespective of the legal status of the organization. In real life, some forms of organizations like private limited and public limited companies are considered to be separate entities whereas other forms like partnerships and sole proprietorships are considered to be part of the owner’s entity. Accounting does not make this distinction.
The entity concept may seem to be a frivolous and obvious assumption of accounting. However, the implications that thus assumption creates is both start and counterintuitive. Here is a look at the implications.
The entity concept considers the company separate from its owners. Thus, capital is money that owners have lent to the company. This is why it appears on the liabilities side of the company’s financial statements. If you prepare the owners personal financial statements, the same capital will appear as his asset.
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An Overview of Contracts and Why They are Important to Business and Society
February 12, 2025
