Entity Theory

AAA

DEFINITION of 'Entity Theory'

The assumption that the economic activities of a business is distinct from those of its owners. The entity theory maintains that the activities of a business can be accounted for separately from the activities of its owners, therefore the owners are not personally responsible for loans or other liabilities taken on by the company. The entity theory is fundamental to modern accounting.

INVESTOPEDIA EXPLAINS 'Entity Theory'

From a business liability standpoint, limited liability for owners in certain business structures is very important for commerce. But in order to maintain a system whereby owners are not personally liable for the liabilities of a corporate entity, it must be possible to separate the business finances from those of the owners.

RELATED TERMS
  1. Accounting Entity

    A clearly defined economics unit that is accounted for separately. ...
  2. Accounting

    The systematic and comprehensive recording of financial transactions ...
  3. Subchapter S (S Corporation)

    A form of corporation that meets the IRS requirements to be taxed ...
  4. Corporation

    A legal entity that is separate and distinct from its owners. ...
  5. Sole Proprietorship

    The sole proprietor is an unincorporated business with one owner ...
  6. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
Related Articles
  1. Professionals

    Are You An FA Looking For A New Job? Read This First

    The choice between a larger or smaller company may be decided by an advisor's experience or temperament. Find out the best size for you.
  2. Entrepreneurship

    Don't Get Sued: 5 Tips To Protect Your Small Business

    Find out what you can do to limit risk and keep your business running smoothly.
  3. Investing Basics

    The Basics Of Corporate Structure

    CEOs, CFOs, presidents and vice presidents: learn how to tell the difference.
  4. Entrepreneurship

    In Small Business, Success Is Spelled With 5 "C"s

    Incorporating these steps will help your business thrive in a competitive market.
  5. Personal Finance

    Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  6. Entrepreneurship

    Should You Incorporate Your Business?

    Find out how becoming a corporation can protect and further your finances.
  7. Entrepreneurship

    Is An ESOP Right For Your Business?

    Discover how to transfer your company's net worth to the next generation of entrepreneurs.
  8. Investing Basics

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  9. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  10. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center