Page 11 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 1.4.2 Business Entity Concept

This concept treats the owner as totally a different entity from the business. To put in to nutshell
“Owner is different and Business is different”. The capital which is brought inside the firm by
the owner, at the commencement of the firm is known as capital. The amount of the capital,
which was initially invested, should be returned to the owner considered as due to the owner;
who was nothing but the contributory of the capital.

Example: Mr. Z has brought a capital of 1 lakh for the commencement of retailing
business of refrigerators. The brought capital of 1 lakh is utilized for the purchase of refrigerators
from the Godrej Ltd. He finally bought 10 different sized refrigerators. Out of 10 refrigerators,
one was taken away by himself as the owner.

Figure 1.4

Type of Capital

Real Capital: Monetary Capital:
10 Refrigerators @ 1 lakh 1 lakh provided by Mr. Z

In the Angle of the Firm

The amount of the capital 1 lakh has to be returned to the owner Mr. Z, which considered being
as due. Among the 10 newly bought refrigerators for trading, one was taken away by the owner
for his personal usage. The one refrigerator drawn by the owner for his personal usage led the
firm to sell only 9 refrigerators. It means that 90,000 out of 1 Lakh is the volume of real capital
and the 10,000 worth of the refrigerator considered to be as drawings; which illustrates the
capital owed by the firm is only 90,000 not 1 lakh.

In the Angle of the Owner

The refrigerator drawn worth of 10,000 nothing but 10,000 worth of real capital of the firm
was taken for personal use as drawings reduced the total volume of the capital of the firm from
1 lakh to 90,000, which expected the firm to return the capital due amounted 90,000.

Owner and business organizations are two separate entities

1.4.3 Going Concern Concept

The concept deals with the quality of long lasting status of the business enterprise irrespective
of the owners’ status, whether he is alive or not. This concept is known as concept of long-
term assets. The fixed assets are bought in the intention to earn profits during the season of
the business. The assets which are idle during the slack season of the business retained for
future usage, in spite of that those assets are frequently sold out by the firm immediately
after the utility leads to mean that those assets are not fixed assets but tradable assets. The
fixed assets are retained by the firm even after the usage is only due to the principle of long
lastingness of the business enterprise. If the business disposes the assets immediately after

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