Examples of larger accounting entities include corporations, partnerships, and trusts. A special purpose vehicles SPV is an accounting entity that exists as a subsidiary company with an asset and liability structure as well as a legal status that makes its obligations secure even if the parent company goes bankrupt. An SPV may also be a subsidiary of a financial corporation designed to serve as a counterparty for swaps and other credit-sensitive derivative instruments.
A derivative is a security whose value is determined or derived from an underlying asset or assets, such as a benchmark. Sometimes, special purpose vehicles—also called special purpose entities or SPE s—can be used nefariously to hide accounting irregularities or excessive risks undertaken by the parent company. In general, any business or revenue-generating organization is considered to be an accounting entity—filing its own taxes and preparing its own financial statements.
These can include corporations, sole proprietorships, partnerships, clubs, and trusts, as well as individual taxpayers.
Companies may legally structure certain divisions or sub-units as their own distinct accounting units in order to separate the cash flows, risks, and profits from the parent company. They may do this because the sub-unit is involved with operations that differ greatly from the parent company's core business. It can also be done to decrease the riskiness of the sub-unit or parent in order to gain access to more favorable credit terms or more easily raise new capital.
Certain accounting entities, like SPVs, can be structured in order to hide losses or launder money. These need to be scrutinized in order to be sure there is nothing nefarious going on. One SPV gone wrong is exemplified by Enron , which misused an accounting entity such as this, ultimately leading to one of the largest bankruptcies in history.
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So helpful!!! Thanks a lot Reply. It is a very helpful dude ….. This text that you have already submitted is very useful to student Reply. Nice material. Very useful Reply. Is business entity mean business and owner r same or different Reply. I found it meaningful! Keep on posting such valuable articles. This material is very helpful Reply.
Thank You very usefull Regards Reply. However, if the business owner takes the company owned car and uses his business credit card to purchase gas while on a week-long vacation, those expenditures should not be recorded as business expenses in the company financial records but should be taken as a personal withdrawal.
Another business entity example that requires separate accounting is when distinct divisions exist within a company or an individual owns more than one business. If your business grows, you may have the opportunity to expand beyond the scope of your current operations.
You may choose to set up a separate division within the company to handle this new business opportunity. In order to track the financial health and operations of this segment of the company, it is a good idea to record all the income and expenses separately from the other part of the company. This can be done by utilizing "classes" within accounting software such as QuickBooks.
For tax and legal purposes, the division still falls under the auspices of the main company, but the separate accounting will enable you to evaluate the its financial health independently. Similarly, if a business owner runs more than one company, separate entity assumption should be maintained for each business. Although the owner is the same, the companies may be very different in scope and size, and all transactions should be recorded separately. It is run by an individual for his own benefit and he does not have to share his profits with anyone else.
As per the business entity assumption, the financial transactions of the owner and business are treated and accounted separately. However, the sole proprietorship does suffer from having unlimited liability.
This means that in the case of a company going bankrupt, the owner will be personally liable to pay the dues of the company from his personal assets. This is because the business entity principle does not talk about the separation of any legal issues, it merely requires that the financial transactions of the owner and company are recorded separately.
A general partnership is an agreement between two or more people of coming together to run a business. Each partner has a certain portion of capital invested whether it is in the form of money, skill or labor and then share in the profits and losses as per agreed upon terms. A general partnership is similar to a sole trader in terms of having unlimited liability, which means that the partners are personally liable for the debts of the company.
A limited liability partnership does away with this problem. The owners and the business entity are legally two separate entities. Therefore, if a business is bankrupt, the partners do not have to lose their personal possessions as in the case of a general unlimited liability partnership. These are business entities that combine the pass-through taxation benefit of a sole trader with the limited liability benefit of a corporation.
Due to the high flexibility in its structure, registering an LLC is a long and arduous process.
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