2.2 Accounting records and the business entity concept

The accounting records for even the simplest business must be kept separate from the personal affairs of the owner or owners. This concept that the business stands apart from the owners is known as the business entity concept.

What is the simplest type of business entity?

The simplest type of business is known as a sole trader or a sole proprietor. It is a business that is owned and controlled by one person, although the business may employ other people. Sole traders normally adopt a trading name, but the business has no separate legal existence from the owner. As a result, the sole trader (i.e. the owner), although entitled to receive all of the profit or net income of the firm, is also personally liable for the debts of the business. This is referred to as unlimited liability. For bookkeeping and accounting purposes, however, the sole trader will run his or her business as a separate entity following the ‘business entity concept’.