Entity theory

Entity theory is the concept that the transactions associated with a business should be separated from those of its owners. Only by doing so can one discern the financial results and financial position of the business. Under this theory, the owners are not responsible for the liabilities of the organization, so their assets should not be commingled with it. This theory breaks down somewhat in the case of a sole proprietorship, where the owner is responsible for the liabilities of the entity.

Related Courses

Accountants' Guidebook 
Bookkeeping Guidebook