What is the economic entity assumption? Give an example of its violation.
QUESTION
What is the economic entity assumption? Give an
example of its violation.
The economic entity assumption is an accounting concept according to which it is required to separate the activities of the owners from the activities of the entity that is, business must be treated separately from the owners. Violating it may result in larger penalties and punishments. For example, if an individual draws some amount from his
business funds for the interiors of his house and reports it as a business expense, it constitutes a violation. He was required to report that amount as drawings instead of expenses as it was his personal expense not of business.
ANSWER:
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