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Difficulty: MediumAccounting Concepts and Conventions

Mallam Aminu, the sole proprietor of Aminu Enterprises, paid 150,000150,000 Naira for his personal residential rent using cash from the business bank account. The accountant recorded the transaction by debiting the owner's drawings account and crediting the bank account. Which accounting concept justifies treating this personal transaction separately from the operating expenses of the business?

  1. Business Entity conceptAnswer
  2. B
    Going Concern concept
  3. C
    Money Measurement concept
  4. D
    Accrual concept

Answer

Business Entity concept
The Business Entity concept establishes that an enterprise is a distinct economic unit separate from its owner. Therefore, when an owner uses business funds for personal use, the transaction is recognized as drawings (a reduction in owner's equity) rather than an operating expense of the business.

Step-by-Step Solution

1
Analyze the financial transaction described in the stem.
The owner used business funds (150,000150,000 Naira) to settle a purely personal obligation (residential rent).
Identifying the nature of the expenditure distinguishes business operating expenses from owner transactions.
2
Evaluate accounting concepts that govern the financial separation of owner and enterprise.
The Business Entity concept mandates that the financial activities of the business must be kept separate from the personal affairs of its owner.
Without this separation, financial statements would distort true business profitability and capital.

Key Concept

Business Entity Concept
Estimated Time:1m 15s
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Topics

Accounting Concepts and Conventions

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