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. Capital Expenditure (CAPEX)

    Funds used by a company to acquire or upgrade physical assets ...
RELATED FAQS
  1. How is reconciliation treated under generally accepted accounting principles (GAAP)?

    The generally accepted accounting principles, or GAAP, provide different reconciliation rules for balancing many kinds of ... Read Full Answer >>
  2. Where did the concept of reconciliation in accounting come from?

    Financial accountants perform reconciliation to ensure that the balances of two accounts are in agreement. The process by ... Read Full Answer >>
  3. Are all fixed costs considered sunk costs?

    In accounting, finance and economics, all sunk costs are fixed costs. However, not all fixed costs are considered to be sunk. ... Read Full Answer >>
  4. What is the difference between work in progress (WIP) and raw materials in accounting?

    Raw materials and works in progress (WIP) are distinct categories in financial accounting for business inventory. Each applies ... Read Full Answer >>
  5. How is accounting in the United States different from international accounting?

    Despite major efforts by the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, ... Read Full Answer >>
  6. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
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. Economics

    Understanding Carrying Value

    Carrying value is the value of an asset as listed on a company’s balance sheet. Carrying value is the same as book value.
  9. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  10. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.

You May Also Like

Hot Definitions
  1. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  2. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  3. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  4. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  5. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  6. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
Trading Center