Economic Entity Assumption

An economic entity can be any organization or unit in society. It may be a company (such as General Electric Company), a governmental unit (the state of Ohio), a municipality (Seattle), a school district (St. Louis District 48), or a church (Southern Baptist). The economic entity assumption requires that the  activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. To illustrate, Sally Rider, owner of Sally's Boutique, Similarly, PepsiCo, CocaCola, and Cadbury -Schweppes are segregated into separate economic entities for accounting purposes.

Proprietorship. A business owned by one person is generally a proprietorship. The  owner is often the manager/operator of business. Small service-type business (plumbing companies, beauty salons, and auto repair shop), farms, and small retail stores (antique shops, clothing stores, and used-book stores) are often sole proprietorships. Usually only a relatively small amount of money (capital) is necessary to start in business as a proprietorship. The owner (proprietor) receives any profits, suffers any losses, and is personally liable for all debts of the business. There is no legal distinction between the business as an economic unit and the owner, but the accounting records of the business activities are kept separate from the personal records and activities of the owner.

Partnership. A business owned by two or more persons associated as partners is a partnership. In most respects a partnership is like a proprietorship except that more than one owner is involved. Typically a partnership agreement (writen or oral) sets forth such terms as initial investment, duties of each partner, division of net income (or net loss), and settlement to be made upon death or withdrawal of partner. Each partner generally has unlimited personal liability for the debts of the partnership. Like a proprietorship, for accounting purposes the partnership transactions must be kept separate from the personal activities of the partners. Patnerships are often used to organize retail and service-type business, including professional practices (lawyes, doctors, architects, and certified public accountants).

Corporation. A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is a corporation. The holders of the shares (stockholders) enjoy limited liability; that is, they are not personally liable for the debts of the corporate entity. Stockholders may transfer all or part of their shares to other investors at any time (i.e., sell their shares). The ease with which ownership can change as to the attractiveness of investing in a corporation, the corporation enjoy an unlimited life.

Although the combined number of proprietorships and partnerships in the United States is more than five times the number of corporations, the revenue producted by corporations is eight times greater. Most of the largest enterprises in the United States-for example, ExxonMobil, General Motors, Wal-Mart, Citigroup, and Microsoft-are corporations.

Post by : Rony Sutiyanto