Explain what is meant by the accounting entity convention.

Question

Explain what is meant by the accounting entity convention.

Answer 1

An accounting entity is a specific company. If you have two different companies, you have two accounting entitites, etc.

Answer 2

The link below will help you understand this. Basically it means that when the accounts are drawn up they reflect the position of the accounting entity ( the business). The business is considered to be separate from the owners of the business. So everything that the business owns, after settling all its debts to the various creditors of the business, is owed to the owners (SHAREHOLDERS).  This is on account of the accounting formula which is:

Assets = Liabilities + Owners Equity