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Fundamentals of accounting
Fundamentals of accounting

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3.1.1 The business entity concept

The business entity concept states that the business is separate from the owner(s) of the business. Therefore the accounting records for even the simplest business, the sole trader, must be kept separate from the personal affairs of the owner or owners.

There are basically three types of business entity:

  • sole trader
  • partnership
  • limited company.

The principles of double-entry accounting apply to all forms of business organisation, as well as not-for-profit organisations.

As you learned in Week 1, any business starts with no money. It needs resources to be able to operate and those resources have to be financed. Right from the start it often also needs to incur debts or liabilities to buy assets such as equipment and inventory that it will use for future financial benefit. Assets, capital and liabilities are the elements of the accounting equation, which expresses the relation between these elements.