Separate Business Entity Assumption

Separate Business Entity Assumption

The separate business entity assumption means that the accounting for a business will be kept separate from the accounting for personal finances as well as from other businesses. The separation of business objectives helps provide users with information relevant to the business and therefore useful for decision making.

Separating Business and Personal Objectives Allows Better Measurement of Both

The separation of business objectives and personal objectives is also relevant to business owners.  By separating business and personal objectives we are better able to define and measure the success of both.

We can think of the business objective as revenue generation. A business’s mission statement will define what a business does to generate revenue, but from an accounting standpoint, the objective of revenue generation will help guide business actions.

We can think of the personal objective as a goal of being happy or living well. Personal objectives will vary from person to person, and for more detail on personal objectives we would need a philosophy class.

Why Have A Separate Business Checking Account?

An example of separating business and personal objectives is the creation of a separate business checking account, a separate account allowing us to track the business revenue and expenditures more quickly, most deposits into the business checking account being revenue and most withdrawals being expenses.

How To Differentiate Business and Personal Expenses & Assets

The difference between a business expense and a personal expense is the objective for the expense. For example, if we went out to dinner the cost of the meal may be business or personal depending on the objective. If we took clients to dinner to pick up new business engagements, the meal would be a business expense and if we took our family out to dinner to have fun and live well it would be a personal expense.

In a similar way as expenses can be either business or personal, assets can also be either business or personal in nature. For example, if we purchase a building with the intention of making widgets for sale the building would be an asset rather than an expense because it will help generate revenue in the future and has not yet been consumed. On the other hand, if we purchase a building to live in as a home it would be a personal asset, the objective being to live will.

How Business Objectives Relate To Personal Objectives

Separate Business Entity AssumptionOur business objectives can be thought of as fitting inside our larger personal objectives, the generation of revenue being part of our larger personal goals of living well.

As the business grows and achieves the business objective of revenue generation owners can begin taking money and resources out of the business to be used for their larger personal objectives of living well.

Accounting Objectives – Short Overview

Accounting Compared to Checkers Game

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