An accounting concept that considers a firm (a business or an entity) to be financially separate from its owners. This concept is reflected in preparing financial statements for the firm on its own and without taking into account the net worth and income, and generally the finances of its owners (as these all are treated as personal finance matters that having nothing to do with those of the firm).

In that sense, the activities of the entity, but not those of the owners, will be the subject matter of its financial accounting and reporting process. Accordingly, transactions and all related events will be tackled from the viewpoint of the entity itself. This concept is used as basis for separation of the funds (capital) provided by owners and other forms of owners’ personal wealth: the capital contributed by the owners is deemed liability of the entity. Other examples of separation in terms of accounting treatment include retained earnings, debts, and withdrawals.