Accounting Concepts

Business Entity, Duality and Money Measurement

Business Entity

The business is treated as a separate legal and accounting entity from its owner(s), regardless of whether it is incorporated.

• All transactions are recorded from the business's perspective, not the owner's
• If the owner takes cash or goods for personal use, this is recorded as drawings — not as an expense of the business
• Drawings double entry: DR Drawings / CR Bank (for cash) or DR Drawings / CR Purchases (for inventory taken)
• The drawings account is closed off to the capital account at the year end: DR Capital / CR Drawings

Application: An owner pays a personal electricity bill using business funds. Business entity requires this to be treated as drawings, not as a business expense. If treated as an expense, profit is understated.

Duality

Every transaction has two equal and opposite effects on the accounting records. This is the basis of double entry bookkeeping and ensures the accounting equation always balances:

Assets = Liabilities + Capital

• One account is debited; another account is credited
• The debit amount always equals the credit amount
• The trial balance tests this — if DR ≠ CR, an error exists

Money Measurement

Only transactions that can be expressed in monetary terms are recorded in the financial statements.

Recorded: sales, purchases, wages, rent, depreciation — all have a monetary value.

Not recorded (excluded):

• Employee morale or motivation
• Quality of management or reputation
• Environmental and social responsibility
• Brand loyalty or customer satisfaction

Limitation: Financial statements may give an incomplete picture of a business's true value or performance because non-monetary factors (e.g. a highly skilled workforce) are excluded.