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For accounting purpose,
a company/business firm is considered as an entity
separate from its owners/promoters.
This is known as the Principle of Separate
Entity. This principle requires that every
business transaction be viewed from the perspective
of the firm and not from the point of view
of the owners.
It is for this reason, that the capital
represents liability for the company as conceptually,
company has the obligation to pay back to the
owners.
In the absence of this principle, it will
be difficult to determine the true income (or
loss) of a business firm because there will be
no record either of the capital bought in by the
owner(s) or the withdrawals (in cash off and on)
made by them.
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