THE ENTITY CONCEPT
When you create a new company, you are creating an entity. The reason it's called an entity and not a business, is because there are different forms of businesses.
eg. Close Corporations in South Africa, Private Companies, Public Companies, Government Departments and so forth.
So we always look at the transactions which happen in a business, from that businesses point of view.
So when you create a database with an Accounting Software package such as Pastel, you are putting this principle to use.
The reason many small business owners and entrepreneurs struggle to get their businesses off the ground is because they do not clearly mark out the line between their personal finances and the business finances.
What do I mean?
Johnny starts a business. He used to be a mechanic and decided to branch out on his own. He used to earn R6 000 per month as a salaried mechanic, but noticed that the turnover he was bringing in was a lot more than R30 000. So, now he decides that R30 000 looks a lot better than R6 000, he is currently earning. So he takes the plunge and starts his business.
He then starts his business and some of the clients who love his work, come and join him. His business then makes R6 000 per week. Because he is in control of the finances of his business, he decides to take R4 000 for himself per week.
Unfortunately, he is now seeing the income which is coming into the business as his own income; and not the business income. He then gets used to R16 000 a month, not R6 000 a month.
Then comes December and January; and all his customers go on holiday and he then has no income. If he treated himself as another employee of the business, he would have had a substantial cash balance in the bank, as well as the fact that he would not owe SARS (South African Revenue Services) a huge amount at the end of the financial year.
So, the entity concept is not just important from an accounting point of view, but makes great business sense.