Definition of entity theory’
The theory of essence is the assumption that all kinds of economic activities, conducted business separately from its owners. The theory of essence is based on the idea that all activities can and will be taken into account, regardless of the activity owners. According to this theory, owners are not personally responsible for credits and liabilities of the company.
Breaking down the ‘entity theory’
From a business point of view, limited, limited liability for owners of some companies is important for trading. To maintain a system that separates the owners from liability company theory entity establishes a baseline that allow to separate Business finances from the owners.
The separation of personal and professional business is a consistent and important aspect of trading around the world. The theory of essence is an integral part of all aspects of the trade.
Accounting theory entity
The theory of essence is a fundamental aspect of modern accounting. It is based on a simple equation:
Assets = Liabilities + Equity
According to the theory of the nature, obligations, shares with separate legal standing and rights in the business. In respect of accounting theory, the subject retains liabilities, assets, revenues, expenses, and other financial aspects of the company separate from your personal finances and financial activities of the owners of the company. Thus, the identity of the society and the individual owners and managers of the company separately.
Criticism of the theory
Although the basic concept of the theory of essence has been published since the 19th century, she was unable to vast following. This is partly due to basic and fairly obvious criticism that had been attached to the theory. Ultimately, the company itself is not an independent entity, but a tool or an extension of the owners (and/or managers), which is designed to make a profit. This profit is always associated with wallet holders. The owners are similarly bound to the company that they may be significant stakeholders in the firm. Thus, for every penny of the investment of the owners pour into the company, they expect a return. Investments in companies not only to attract capital, but typically involves physical and intellectual capital or time, sweat and mental facilities that the owners invested in the company.
Despite the fact that the theory is not too popular, largely due to the lack of realism of relationships in practice, the theory of essence was invaluable to the companies with limited liability accounting.