Question

Assertion (A) : Personal transactions of the owners of the business are not recorded in the books.

Reasoning (R) : According to the business entity concept, each business enterprise is considered as an accounting unit separate from owners.

1. Both (A) and (R) are correct and (R) is the correct explanation of (A).
2. Both (A) and (R) are correct but (R) is not the correct explanation of (A).
3. (A) is correct but (R) is not correct.
4. (A) is wrong but (R) is correct.

Answer 1

Correct Answer - Option 1 : Both (A) and (R) are correct and (R) is the correct explanation of (A).

Basics of Accounting:

1. In accounting, a business or an organization and its owners are treated as two separately identifiable parties. This is called the entity concept.
2. The business stands apart from other organizations as a separate economic unit.
3. It is necessary to record the business's transactions separately, to distinguish them from the owners' personal transactions.
4. This helps to give a correct determination of the true financial condition of the business.
5. This concept can be extended to accounting separately for the various divisions of a business in order to ascertain the financial results for each division.
6. Under the business entity concept, a business holds a separate entity and distinct from its owners. "The entity view holds the business 'enterprise to be an institution in its own right separate and distinct from the parties who furnish the funds".
7.  The owner is treated as a creditor and the capital invested is regarded as a liability. It applies to all forms of business organizations.

Thus, Both (A) and (R) are correct and (R) is the correct explanation of (A).