The entity assumptions requires that all of the transactions of the business and the items reported on the business's financial statement are kept seperate from the finances of the business's owners. When the business is a sole proprietorship, for legal purposes the business and its owner are considered one entity, but for accounting purposes they are considered two distinct entities.
The assumption also requires that the financial reports of an economic entity are kept seperate from all other economic entities. The only exception is in the case where own entity owns a large enough stake in another entity to require that stake be reported in consolidated financial statements.
The key-take away from this assumption is that seperate accounting records must be kept for each economic entity, and the assets and the liabilities of owners should not be mixed up with the assets and the liabilities of the business - even in the case where the business is a sole proprietorship or partnership. It also requires that every business transaction be associated with an entity.
The entity assumption is also known as the economic entity assumption, the business entity assumption, the business entity principle, and the entity principle .
- Business
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- Accounting
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- Financial Accounting & Bookkeeping
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- Accounting Standards
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- Basic Generally Accepted Accounting Principles (GAAP)
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