Explain the concepts of business entity

The relevance of accounting concepts and principles in Book-Keeping is to improve the communication of financial information in a language that is acceptable and understandable among enterprises. The principles promote uniformity in the preparation of financial statements, making it possible for people to compare the financial performance and position of different enterprises. The concepts are there to make financial statements and reports relevant, reliable, and understandable to users of the financial information.

None of the accounting concepts presented above is expected to be applied in isolation. In many cases, the application of some accounting concepts will reinforce others. A few examples are given to explain such relationships:

1. The Going Concern Principle and the Historical Cost Concept The assumption of a going concern has an effect on the values of assets and liabilities that are reported in the financial statements. When thinking about the figure to be reported for different assets in the financial statements, a business has to avoid looking at the value that each such asset can be sold at in the market at present time. This is because doing so will reflect an assumption that the assets are held for the purpose of being sold rather than for the purpose of being used in a business. Reporting assets at market value would be appropriate when the business is expected to be closed in the near future (that is, within the next 12 months) or the business is no longer a going concern. The historical cost concept makes this possible by prescribing that assets should be reported at their historical cost unless there are reasons to conclude that the business is no longer a going concern.

2. The Going Concern Concept and the Accounting Period Concept The going concern principle literally assumes no end in the lifespan of a business. It means that one was to wait up to the end of business to determine a profit or a loss. Because of the need to know the performance of business, the life of a business is divided into uniform accounting periods at the end of which financial statements are prepared and presented. In this way, the going concern principle is observed, but without affecting the ability of the business to measure its performance.

3. Accounting Period Concept and the Matching Principle As already defined, the accounting period is reflected in the act of dividing the life of a business into a uniform length of accounting periods. It is known that at the end of each period, the performance of an entity is measured by matching revenue and expenses. If there was no uniformity in the period covered by expenses and the one covered by revenues, then there would not be any meaningful profit or loss determination.

1. When the owner invest Sh 96,000 into the business. It is assumed that the owner has lend such money to the business firm and such a transaction is recorded as capital, a liability in books of a business firm.

2. If the owner with draw Sh 20,000 from the business for his/her private use it is assumed that the business firm has reduced the amount payable to the owner and instead of the debts of the business to its owner being Sh 96,000 it will be Sh 76,000. (Drawings reduces capital).

3. The transactions made in books of business firm should therefore be reflecting the activities of a firm and completely disregard the activities of the proprietor. The only time that personal resources of proprietor affects the accounting records of the firm is when the proprietor introduce capital into the firm or takes own out of it.