Financial literacy in sole proprietorship: the entity concept / Raziah Bi Mohamed Sadique, Musliha Musman and Salwa Muda

Running a business as a sole proprietor comes with its fair share of challenges, and financial literacy is one of the most important skills to master. Financial literacy is a complex concept encompassing knowledge, skills, and attitudes about effectively managing financial resources (Amirtha, 2024). It plays a crucial role in financial management, particularly for small and medium enterprises (SMEs). Studies have shown that financial literacy significantly affects financial management based on the economic entity concept, which separates business finances from personal finances (Dewi Fadila et al., 2023). However, many SMEs struggle to fully implement this concept in their financial statements due to familiarity with more straightforward accounting methods (Fadila Cristy et al., 2024). One key concept that every sole proprietor should understand is the entity concept, the idea that a business should be treated as a separate financial entity from its owner. The economic entity concept is fundamental to proper financial management and reporting, requiring separate recording of business and owner transactions (Fadila Cristy et al., 2024). Even though a sole proprietorship is not legally distinct from its owner, keeping business and personal finances separate is crucial for managing money effectively, maintaining accurate records, and ensuring long-term success. The entity concept comes from accounting principles and emphasizes that a business’s financial transactions should be recorded separately from the owner's expenses. This helps provide a clear picture of the business’s financial health without interference from personal spending.