Account 4 Marks Question

In the above statement it is the Principle of Business Entity which is implied. As per this principle, business is treated as distinct and a separate entity from its owners. In simple words, we can say that business and its owners are different. In fact, the business (firm) borrows money from the owners (which is regarded as capital) and in return, the business pays interest on this money so borrowed from the owner. Thus, in this manner, the capital invested is a liability for a business. Hence, in accounting sense, it means one separate entity (owner) is assumed to be giving money to another distinct entity (business unit).

The above quoted statements highlights the importance of matching principle. As per the principle the revenues earned during a period should be correctly matched against the expenses incurred by a firm during an accounting period to correctly report the accounting profits earned during a year. Accordingly, there is a need to ascertain and report the corrected revenues and cost of earning revenue so as to account for corrected profits.