Economic Entity Principle - AccountingTools

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The Economic Entity Principle

The economic entity principle states that the activities of a business entity will be kept separate from the activities of its owner(s) and any other business entities. This means that you must maintain separate accounting records for each entity, and not intermix with them the assets and liabilities of its owners or business partners. Also, you must associate every business transaction with an entity.

A business entity can take a variety of forms, such as a sole proprietorship, partnership, corporation, or government agency.

It is customary to consider a commonly-owned group of business entities to be a single entity for the purposes of creating consolidated financial statements for the group.

The economic entity principle is a particular concern when businesses are just being started, for that is when the owners are most likely to commingle their funds with those of the business. A typical outcome is that an accountant must be brought in after a business begins to grow, in order to sort through earlier transactions and remove those that should be more appropriately linked to the owners.

Similar Terms

The economic entity principle is also known as the business entity assumption, business entity principle, entity assumption, entity principle, and economic entity assumption.