Definition of Entity in Accounting

by Chris Newton, Demand Media
Accountants need to separate all appropriate entities in an organization's financial records.


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Accounting is full of terms that accountants and other financial professionals must understand to do their jobs well. For accounting purposes, an "entity" is a business, division or other aspect of an organization that requires its own financial reporting structure for legal or tax purposes. Accountants must be able to identify and define various units within an organization to manage financial records. An entity in accounting is also sometimes called a "reporting entity."

Basic Definition

Entities are accounting units that engage in some sort of accounting activity, or has economic assets that must be accounted for. For example, investments or financial transactions, like the sale of a product, are accounting activities that might apply to an entity, and must thus be recorded and associated with that entity. Think of it like a category for financial records or transactions. Once an entity is defined, all transactions relating to the entity are reported underneath the entity or category.

Entity Examples

There are a number of possibilities for different entities within an organization. For example, a company with different divisions of the business might define each division as an entity. Also, each department or team within an organization might be its own entity. A product can be an entity, as well as a company's investments or assets.

Other Characteristics

Entities in accounting influence economic resources; the more entities an organization has, the more employees the organization needs to track all financial records of each entity. Entities also must be separate from the personal financial activities of company owners, investors or employees. It is a best practice that entity details not change frequently or at all. For example, if an entity in an organization is defined as a particular investment account or group of investments, it is generally not good practice to add or remove other investment accounts to or from the entity. Keeping the entity details the same ensures consistent accounting and financial record keeping. Instead, the company should create a new entity to account for new investments.

Purpose of Entities

Different businesses or divisions within an organization must be accounted for separately, so accountants create different entities to more accurately report financial records for each aspect of an organization. Aside from legal and tax purposes, entities are also used to help accountants organize an organization's financial records and transactions. Also, accountants and finance executives can use records from various entities to predict future financial growth or loss, and make more informed decisions about what direction to take a company. For example, if one particular entity is performing well, such as a division in a company, then company leaders can use that entity's financial records to make a case to board members to allocate more budget and employees to the well-performing division. Similarly, if a division or entity's financial records indicate consistent loss, company leaders can choose to discontinue that aspect of the business, or take action to make it profitable.

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