Accounting entity definition
/What is an Accounting Entity?
An accounting entity is a business for which a separate set of accounting records is maintained. The organization should engage in clearly identifiable economic activities, control economic resources, and be segregated from the personal transactions of its officers, owners, and employees. The accounting entity concept is used to establish the ownership of assets and obligation for liabilities, as well as to determine the profitability of a specific set of economic activities.
Accounting for an Accounting Entity
Once established, a chart of accounts and accounting policies are created for an accounting entity, which form the basis for a separate system of accounting. Business transactions are then recorded in a general ledger that reflect the ongoing activities of the entity. The outcome of these recordation activities is financial statements that are specific to the accounting entity. The financial statements report on the financial outcomes, financial position, and cash flows of the entity. The entity should also have a set of internal controls that are designed to maintain control over assets and reduce the risk of fraud.
Examples of Accounting Entities
Examples of accounting entities are corporations, partnerships, and trusts. Each of these entities maintains a separate set of records that documents its business transactions, and produces financial statements from these records.
Internal Accounting Entities
Several accounting entities may be created and maintained within an existing business. Once this is done, assets and liabilities are assigned to each of the entities, while their financial results are also reported separately. This is typically done because management wants to set up separate cost centers or profit centers, for which separate financial statements are generated. Internal accounting entities may be set up for acquired entities, or for departments, or product lines or geographic regions. These arrangements make it much easier to analyze how efficiently various parts of a business are being run. This approach also makes it easier to create budgets by business segment, since the budgets can be derived based on the specific historical financial statements pertaining to each segment.