Final answer:
Understanding the type of legal entity a business uses is important for setting up an accounting system due to different accounting requirements and regulations for each entity type.
Step-by-step explanation:
Understanding what type of legal entity a business uses is important when initially setting up an accounting system because different types of entities have different accounting requirements and regulations. For example, a sole proprietorship has simpler accounting needs compared to a corporation or a partnership. Each entity type has its own rules for reporting income, expenses, and taxes, and an accounting system needs to be set up accordingly to accurately track and report financial information.