Answer: The purpose of the business unit concept is to maintain a clear distinction between agreements held by the company and those that are personal to an owner. Therefore, owners and corporations are separate entities. The concept of business entity accounting applies to all types of business organizations (i.e., sole proprietorships, partnerships, and corporations), even though a statute does not recognize a corporation and its owner as separate entities. The owner of a business withdrew 50,000 rupees for his personal use. This was reported as a business expense and therefore the profit was reduced. Is that correct from an accounting point of view? …………………………………………………………………………………………………………….. The importance of the business unit concept is critical as it encourages individuals to specify the organization`s financial performance. For example, investors look for a company`s financial records to correlate them with other companies to indicate what a company can use to generate favorable returns. Separate accounting, different from that of the owners, helps them understand how the business grows.
When it comes to tax returns, you need to separate your business and personal returns. It will improve the overall tax planning and administration of your business. In general, any revenue-generating business or organization is considered an accounting unit that files its own tax returns and prepares its own financial statements. These may include corporations, sole proprietorships, partnerships, associations and trusts, and individual taxpayers. In accounting, the concept of a business unit prevents personal and business expenses from becoming entangled, which interferes with determining the correct taxable information. Any money transferred to or from the company must be recorded in a separate accounting journalThe accounting journal, often referred to as the book of the original entry, is first used to record the company`s accounting records when a financial transaction occurs. It`s hard to understand, but it`s essential for business operations and accounting. Read More to avoid confusion.
The management structure can range from the President, Board of Directors and Chief Executive Officer to Section Heads appointed to oversee specific business projects. It is important to note the difference between limited liability and the principle of business unity. The concept of business unit is important in accounting for the following reasons: companies can legally structure certain business units or sub-units into separate accounting units in order to separate the cash flows, risks and profits of the parent company. You can do this because the sub-unit is involved in operations that are very different from the parent company`s core business. It may also be carried out to reduce the risk of the sub-entity or parent company in order to access more favourable credit terms or to raise new capital more easily. An organization or legal entity can generally be characterized as an autonomous organization that has different rights and obligations than its companies, such as: owning assets, entering into agreements, and obtaining damages. A special purpose vehicle (SPV) is an accounting unit that exists as a subsidiary with an asset and liability structure and a legal form that guarantees its obligations even if the parent company goes bankrupt. Mr. Sam is a business owner. He uses two different credit cards – one to pay for business expenses and one to pay for personal expenses.
He pays $200 as his company`s utility bill with his personal credit card. According to the business unit`s accounting concept, the company`s electricity bill should have been paid with the company`s credit card. Paying $200 by personal credit card would therefore be considered Sam`s contribution with additional capital. The disadvantage of a company is that it is subject to what is known as “double taxation”. The first income tax is paid by the corporation on the profits it makes, and the second tax is paid by shareholders on the dividends they receive. Another disadvantage of a business is the high cost required to set it up, and that they are generally more regulated by the government. The concept of business unit explains that a company is independent of its owner and therefore the two must be treated as separate entities when recording transactions.