Economic Entity Assumption

The economic entity or accounting entity assumption presumes that economic events and transactions can be identified with an economic entity. Investors want to know information about an economic entity that associates to their ownership interest. For example, if you would want to invest by buying stocks of Globe Telecom, you would want to know about the various operating units which comprise Globe. You would be interested information not only about its main company but also about its subsidiaries or affiliates. Also, you would not want to combine the information you obtained with that of Smart or other telecommunications company. These are separate economic entities. Note that though Globe, a parent company and its subsidiaries are separate legal entities but viewed as one accounting entity or economic entity. Another key aspect is that organization is separate and distinct from that of the owners. Economic activities of owners and those of the company are separate. Hence, the entity must keep its own records and not merged them with the personal transactions of those who own or run it. Separate entity concept aims to properly account the actual transactions of the organization in order to report the real picture and accurate condition of the business. Alternately, the economic entity assumption is also termed as accounting entity concept, business entity concept, entity assumption, or separate entity assumption.

References : Intermediate Accounting by Spiceland, Sepe, Nelson. McGrawhill, 2011

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