In accounting, entity refers to any organization or part thereof for which separate financial statements are prepared.
Examples of accounting entities include the following:
- Sole proprietorships
- Trusts and NGOs
- Clubs and societies
- Divisions of companies
- Group of companies
- Government institutions
Accounting entities do not necessarily equate to legal entities.
So whereas law may not differentiate between a sole proprietorship business and the sole trader himself, accounting principles require that expenses of the business (accounting entity) be accounted for separately from the personal expenses of the business owner. This is often referred to as the business entity concept.
Conversely, distinct legal entities may be combined and treated as a single accounting entity for the preparation of financial statements. This is most evident in the preparation of the consolidated financial statements of a group of companies whereby separate companies, which are related to each other, are absorbed into a single entity for the purpose of financial reporting. This is an application of the single entity concept.