The Separate Entity Theory

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"The business is rich but the owner is not." Also called the Economic Entity Assumption/Theory, Business Entity Theory, and the Entity Concept, is a fundamental accounting principle that treats a business as a distinct and separate economic entity from its owners or any other businesses. This assumption forms the basis for preparing financial statements and ensures that the financial affairs of the business are kept separate from the personal financial affairs of its owners.

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Because of the business entity theory, the business entity is also considered another actually existing person. In a sole proprietorship, there are two distinct persons: the owner and the business. In a partnership with two owners, there are three persons: the two owners and the business entity.