Business Entity Concept and Monetary Unit Concept
Table of Content:
🔹 1. Business Entity Concept
Definition:
In accounting, the business is treated as a separate entity from its owner(s).
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This means the personal transactions of the owner are not mixed with the business transactions.
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Accounts are maintained only for the business.
✅ Example:
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If the owner puts ₹50,000 into the business → It is recorded as Capital (liability of business to owner).
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If the owner buys a personal car from his own money → Not recorded in the business books.
📌 Importance:
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Keeps accounting records clear and professional.
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Helps to measure business performance separately from personal affairs.
🔹 2. Monetary Unit Concept
Definition:
In accounting, all transactions must be recorded in terms of money (a common unit of measurement, like Rupees, Dollars, etc.).
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Non-monetary items (like employee skills, brand reputation, customer loyalty) are not recorded in the accounts.
✅ Example:
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Buying machinery for ₹1,00,000 → Recorded in books.
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Having a skilled manager → Not recorded, because it cannot be measured in money.
📌 Importance:
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Provides a standard unit (money) to measure and compare all transactions.
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Makes financial statements understandable and consistent.
🔹 Quick Comparison
| Concept | Meaning | Example |
|---|---|---|
| Business Entity | Business is separate from owner | Owner invests money → shown as Capital |
| Monetary Unit | Only money-measurable items are recorded | Machinery recorded, employee talent not recorded |
✅ In short:
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Business Entity Concept → Keep business and owner separate.
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Monetary Unit Concept → Record everything in terms of money only.