Separate Entity Concept forms the base of the accounting principles. It means that for accounting ‘The Business’ is treated independently from The Owners”.
This means that even though anything owned by the business belongs to the owners of the business and anything owed by the business is payable by the owners but for accounting purposes we assume that the business is independent of its owners.
If the business purchases a machine or piece of equipment it will own and obtain benefit from that equipment. Likewise, if the business borrows money from ‘someone’ it should repay the money. This somebody includes even the owner of the business.
This treatment of the business independently from its owners is called the ‘Separate Entity Concept’.
Separate Legal Entity (Corporate Entity) / Limited Liability
Limited company is a legal entity separate from its owners (called shareholders). The basic difference between a partnership and a limited company is the concept of limited liability. In case a sole proprietor or partnership business runs into losses and is unable to pay its liabilities, its proprietor / partners should pay the liabilities from their own wealth.
Whereas in case of limited company the shareholders don’t lose anything more than the amount of capital they have contributed in the company i.e. their personal wealth is not at stake and their liability is limited to the amount of share capital they have contributed.
Limited company is an artificial legal person. It has a legal entity separate from its owners (shareholders). It can enter agreements under its own name, can sue and can be sued.