Home » Accounting Explanation » Introduction to Accounting and its Terminology

Types of Business Entities

1. Profit Oriented / Commercial Entities

Profit oriented or commercial entities are those entities/organizations whose main aim of carrying out business is to earn profit for the owner or owners of the business organization

Sole Proprietorship
Where one person (owner) start a business and risks and returns rest with a single owner

Wherein two or more persons owned a business and all partners (owners) of a firm/business are jointly and severally liable to repay the liabilities of the firm. This implies that in case of bankruptcy of firm/business, the personal properties of partners can be used for the repayment of debts or liabilities of the business as well

Companies or Corporate
Companies are separate legal entities formed under the Companies Ordinance or law of a country. In case of a company the liability of owners (shareholders) is limited. Limited liability implies that the personal property of shareholders or owners won't be used for the repayment of debts or liabilities of the company even through company gets bankrupted 

2. Non Profit Oriented Entities

Non-profit oriented entities are those business entities or concerns where the main purpose of doing business is not to earn profits for the owners / sponsors but to provide benefits to general public or to carry out a social cause

NGOs Non-Government Organizations

Separate Entity Concept

This concept forms the basis of accounting principles or concepts. It implies that for the purpose of accounting ‘the Business is treated independently from the Owners'.

This means that although anything owned by the business belongs to the owner(s) of the business and anything owed by the business is payable by the owner(s) but for accounting purpose we assume that the business is independent of its owners


If a business purchases a machine or piece of equipment, it will own and obtain benefits from that Equipment. Likewise, if a business borrows money from ‘someone’ it will have to repay the money. This Someone includes even owner of the business. The treatment of business independently from its owners is called the ‘Separate Entity Concept’

Accounting cycle

An accounting cycle is the sequence in which financial data is recorded until it becomes the part of financial statements at the end of accounting period. In other words, it’s a sequence of steps to record financial information in precise manners. For example accounting cycle is preparing journals, preparing ledger accounts, preparing trial balance, passing adjusting entries and at the end of accounting period preparing financial statements ( such as Income statement, Balance sheet, Cash flow statement etc)

Accounting cycle includes these major steps:

1. Identifying the financial transaction
2. Preparing the documents for transactions such a sales invoice
3. Journalizing the transactions
4. Posting the transactions from journal to ledger account
5. Preparing the trial balance to check the accuracy of accounts
6. Adjusting the entries if there are mistakes or omissions in recording transactions in any book of accounts
7. Preparing financial statements (such as Income statement, Balance sheet, Cash flow statement etc)
8. Posting closing entries to ledger account
9. Preparing 'after closing trial balance' to check the debit balance is equal to credit balance