Theory Base of Accounting — Account STD 11 Commerce — Question

In the above statement it is the Principle of Business Entity which is implied. As per this principle, business is treated as distinct and a separate entity from its owners. In simple words, we can say that business and its owners are different. In fact, the business (firm) borrows money from the owners (which is regarded as capital) and in return, the business pays interest on this money so borrowed from the owner. Thus, in this manner, the capital invested is a liability for a business. Hence, in accounting sense, it means one separate entity (owner) is assumed to be giving money to another distinct entity (business unit).