Why is Accounting Entity Concept an important principle of accounting that a business should follow especially if it is a sole-proprietorship business?
The Accounting Entity Concept is an important principle of accounting that a business should follow because it enables the owner to properly determine whether the business is profitable or not. Each business whether sole proprietorship, partnership or corporation is an independent accounting entity and must therefore prepare a separate financial statement to determine which business is profitable. Although a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. It is especially significant for single proprietorship businesses, due to the frequent misinterpretation of personal assets and costs with business expenses.
What is preferable at the point of view of an investor?
a. To value the business using the Asset Valuation method: or
b. To value the business using the Equity Valuation method.
At the point of view of an investor, the Equity Valuation Method is more preferable in measuring the value of a company's equity. The different equity valuation methods help in analyzing a stock from different perspectives such as how strong a company's financials are and how strong is company’s earning potential. As equity evaluation methods calculates a value of stock, investors can identify whether which stocks are undervalued and is a good investment. Equity valuation helps find stocks that are undervalued and thereby helps investors in picking the right stocks to make an optimum portfolio.