Entity Theory


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.

BREAKING DOWN '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.

  1. Accounting Entity

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

    The systematic and comprehensive recording of financial transactions ...
  3. Sole Proprietorship

    The sole proprietor is an unincorporated business with one owner ...
  4. Corporation

    A legal entity that is separate and distinct from its owners. ...
  5. Subchapter S (S Corporation)

    A form of corporation that meets the IRS requirements to be taxed ...
  6. Accountant

    A professional who performs accounting functions such as audits ...
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