hi everyone welcome back today in this video we are going to understand what is this business entity concept that we have in accounting and what is the logic behind it see it's really simple what this concept says is that for accounting purpose we always treat the business separately from its owner business is separate owner is separate so no matter what sort of business it is whether it's a single owner business partnership business or a company corporate it doesn't matter this concept will always hold the place business is separate owner is separate is that okay fine now let's understand the implication and the logic of this concept by taking this example now see here we have ms harshita over here who has invested the money into her business pharmacy business and the money invested is called as capital you all know that but now because of entity concept what is happening understand think from the point of view of the business okay you are an accountant of this pharmacy thing from the point of view of business all right so the money which the business has got from miss harshita that money is what is of misharshita so that money has to be returned back to ms harshita isn't it yes business owes that money to ms harshita so that is why that capital that money is a form of liability because it owes to misharshita all right the business owes it to ms harshita so from the point of view of business capital is a form of liability is that okay fine okay now what will happen once the business is you know started what will happen business will do its operation you know the employees will be there and the owner also will be involved in its operation purchase the asset purchase goods pay the expenses sell goods and all these things okay trading activity and either they will generate the profit or loss now let's say profit has been generated profit has been earned so now what will happen now this profit will of course increase the capital if it has been reinvested retained earnings or the owner can withdraw that profit isn't it yes now it's not necessary that owner will withdraw only after generating the profit no the drawings can also happen before also yeah the money which has been withdrawn is called drawings you all know that so this drawings can happen either after generating the profit or before also is that okay fine now why are we calling it as drawings that's also very important why are we not expensing this drawing is not actually an expense okay people say that drawings is an expense actually it's not expensive we don't take drawings to profit and loss all right we deduct the drawings from capital why do we do that why you have to understand this see let's take an example within this example let's say you know after a week let's say ms harshita came to the business you were sitting in the corner you are an accountant and let's say you're also the cashier all right so from the cash drawer ms harshita took out 20 000 money and said that she is gonna pay you know her children fees from that 20 000 okay school fees so now how will you treat as an accountant as an accountant of this business of this pharmacy how will you treat the school fees let's say what you have done is okay first alternative i'm giving you what you have done is you have passed an entry school fees account debit to cash if you pass this journal entry okay that school fees if you debit that as an expense what will happen cash has reduced of course there is no doubt about it but if you are debiting the school fees what will happen if you are debiting this as an expense then this school fees will go where to profit and loss if it is going to profit and loss account then what will happen your profit will be decreased isn't it the profit will be decreased of course see here if you're booking this as an expense 20 000 expense will be recorded in profit and loss on the debit side so your profit will decrease and it would be incorrect profit because this school fees is a personal expense of ms harshita because of this school fees the business is not benefiting anything this school fees is not helping to generate the revenue for this business so this is not an expense of the business this is an expense of ms harshita not of the business what is this off for business for business school fees is called as drawings why is that because it's a personal expense of misharshita if you record this as an expense in the business then what will happen incorrect profit will be calculated that is why entity concept comes into the picture entity concept says that business is separate owner is separate whatever that is involved with the owner the personal affairs of the owner record them separately i mean you are not supposed to record it also see here what will happen separate accounting records will be kept see here if you are maintaining you as an account and if you are emitting both the books okay you are doing the accounting of pharmacy also of the owner also separately separately then two books will be maintained pharmacies accounting books and harshita's personal books of accounts all right so 20 000 for that business for the business is drawings and that will be deducted from the capital okay that will be deducted from the capital this will not be expensed if you are expensing that 20 000 then profit will be incorrect profit will be incorrect okay so separate accounting records will be kept but in the harshita's personal books of account that 20 000 is 20 000 is an expense all right but you don't have to see all of that just see this from the business point of view see here this is you accountant i will always see things from the business point of view pharmacies books all right so that 20 000 you will treat this as what as drawings okay that's the idea you have to do everything separately you have to consider that business is a separate entity okay business is separate owner is separate that's all business entity can separate accounting succeed will be kept and everything is separate capital is a form of liability and this profit also who has the right to this profit owner owner can withdraw that profit so that profit if it is reinvested it will increase the capital so that form of liability will increase okay if that profit has been withdrawn then you will consider that as a drawings and drawings will be deducted from capital it will decrease the capital okay because money has taken out i told you harshita invested the money business owes that money back to harshita it's a form of liability if she's taking the money out because of school fees or maybe just like that only just for personal expenses or anything else then it has to be deducted from the capital which will decrease the liability of the business actually this is not liability it's a form of liability you can say but we always call that in accounting as capital only but you have to keep in your mind that capital is a form of liability okay small small part of liability is there in that capital do you understand never refer capital as a liability don't say that you will lose marks but you have to keep in your mind business owes money to ms harshita is that okay so that's it for this video this is what entity concept is it's very simple just consider business separately from its owner for accounting purpose that's it that's all for this video