A more thorough explanation:

The entity assumption is the belief that a business is a distinct entity separate from its owners and other companies. This means that the business has its own identity, separate from the people who own it or work for it.

For example, if you own a small business, the entity assumption means that your business is considered a separate entity from you as an individual. This means that your business can enter into contracts, own property, and be sued or sue others in its own name.

Another example of the entity assumption is when two companies merge. Even though they may have different owners and employees, the merged company is considered a new entity with its own identity.

The entity assumption is important because it allows businesses to operate independently and make decisions without interference from their owners or other companies. It also helps to protect the personal assets of the owners in case the business is sued or goes bankrupt.