Read the given below two statements and mark the correct answer.

Assertion (A): The concept of business entity assumes that business has a distinct and separate entity from its owners.
Reason (R) : Personal transactions of the owner are recorded in the books of the business whether it involves inflow or outflow of business funds or not.

Assertion (A) is true but Reason (R) is False

The correct answer is option 3-  Assertion (A) is true but Reason (R) is False.

Assertion is true but reason is false because personal transactions are recorded in books only when there is inflow or outflow of business funds. Funds used for personal use are treated as drawings.

The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business. The accounting records are made in the book of accounts from the point of view of the business unit and not that of the owner. The personal assets and liabilities of the owner are, therefore, not considered while recording and reporting the assets and liabilities of the business. Similarly, personal transactions of the owner are not recorded in the books of the business, unless it involves inflow or outflow of business funds.