Intuition behind business entity concept?

Question

Following definition is the representative of the plethora of definitions one would find on the internet:

The business entity concept declares that a business stands independently from its owner, and hence the two should be treated as separate entities when recording transactions. Therefore, all business transactions (income, expenses, assets, liabilities, and equity) must be kept separate from the owner’s account to ensure accurate accounting records.

Problem is I am not able to differentiate between the Business and The owners. In other words, I am not able to see them as different entities. To me, business is run by entrepreneurs and is dependent on them and business would not have existed if it’s not for them. And, now this concept says Business is “independent”, well it confuses me, contradicts what I think, and hence I am baffled. How to see the business and its owners as separate entities, is what I am looking for.

P.S. There’s no site to ask for accounting’s academia related questions, so I apologise everyone to ask accounting related questions here.

Answer 1

I think perhaps your confusion arises because you are only thinking about (very) small businesses. Do you imagine Coca-Cola is "run by entrepreneurs"? What about IBM, or Amazon? Even the largest privately-owned businesses (a list which includes Tata Group) aren't "run by entrepreneurs" - they are run by a management team ultimately accountable to the owners.

Sure, many (or even most) companies might be started by entrepreneurs who are also the owners, but they don't necessarily stay that way. From an accounting and legal perspective, it makes things far easier to deal with if the rules are the same for all businesses - it wouldn't make much sense for there to be an abrupt switch in the accounting rules when a business employed its first, eleventh, or whatever-th employee.

Note that for tax purposes, 'sole traders', 'limited liability partnerships', and the like, are treated differently, but a business (or rather its owners!) gets to choose its type for itself.

Answer 2

The quoted statement holds true for all business. Despite being an owner with complete control over the business they should treat the business almost as another person. This "person" should have their own accounts and payment methods. Those payment methods should be used only on that business's expenses.

This leads to cleaner accounting and thus accurate reporting (of things like profits). This allows the business and owner to have a cooperative relationship with tax agencies, banks, and possibly investors.

Sure funding (owner putting money into a business), and draws (owner taking money out of a business) do occur but they should be deliberate transactions and marked as such.

One will get into trouble if there are frequent transactions like "groceries for the owner's family".