Dual aspect concept of accounting

What does the dual aspect concept mean? – Definition

The dual aspect concept of accounting relates to the idea of double-entry bookkeeping. Every transaction affects the business in at least two aspects. These two aspects are equal and opposite in nature. It is also known as the accounting equivalence concept.

Explanation

To ensure a comprehensive and complete record, it is necessary to make two entries to record each transaction. This concept is based on the assumption that business never truly owns anything. Anything that it has (namely assets), it owes it either to outsiders (i.e., liabilities) or to the owner who is also a separate person (i.e., capital). Hence whenever a business gets anything, it must record both facts – an increase in assets and an increase in liability or capital.

Similarly, whenever anything leaves the business, there is a reduction in assets and a corresponding reduction in either a liability or capital. This fact applies to all the transactions that a business may enter into at any stage of its existence.

There are two types of claims against the assets of the business, One of the owners and second of the creditors. So we can say that the total assets of a business are equal to its liabilities. Liabilities to owners are known as capital and liabilities to others are called liabilities. We can express this relationship between assets and liabilities in the form of the following equation which is also known as Accounting

Assets = Liabilities + Capital

This concept is based on the fact that if there is something given, someone else receives it. It can also be said that every time a transaction takes place there is always a two-sided effect. A transaction may affect either both sides or only on one side of the Accounting Equation. Thus according to this concept every transaction has two effects, one is debit and the other is credit for the same amount. It can be explained with the help of the following example:

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Example

If a business is started by Mr. A with cash $100,000 it will have the following effects on Accounting Equation.

Assets                                   =Liabilities                               +Owner’s Equity
Cash     +                              =Capital
1,00,000                               =10,000

If Mr. A purchases goods as credit from Mr. B of $10,000 then the latest position of Accounting Equation will be:

Assets                                   =Liabilities                               +Owner’s Equity
Cash  +  Purchases              =Creditors                               +Capital
1,00,000                               =10,000
1,00,000  +  10,000             =10,000                                  +1,00,000

So every new transaction will affect the accounting equation. It should be kept in mind that both sides of this equation will always remain equal.

Further Explanation

In defining the other accounting concepts, it was mentioned that basically accounting is concerned with the business entity itself rather than its owners, managers or employees.

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Clearly, then, the assets owned by a business enterprise would be the property (or in legal words the equity) of the persons or bodies who had provided the funds for the acquisition of such assets.

Example 2

For example, if Mr. A had provided $500,000 in cash as the capital to start a business styled ‘Modern Traders’, the assets owned by that company at that stage would be a cash balance of $500,000. Corresponding to this amount would be the equity, i.e. an amount which could be claimed by Mr. A. This relationship is expressed as:

Assets=Equities (Claims)

In accounting terms, this transaction would be represented as follows:

Dual-Aspect-of-accounting

Suppose, thereafter, goods worth $400,000 are purchased with this money. The position would change as follows:

Accounting-equivalence-concept-example

Subsequently, if the business enterprise borrows $300,000 from a bank to finance its purchases, the new position would be:

Dual-Aspect-of-accounting-equation

The equity or claim of an outsider is technically called a liability. So we might rewrite our equation in the following ways:

Assets = Equities = Owners’ Equity + Outsiders’ Equity = Owners,’ Equity + Liabilities

Thus, the accounting equation that finally emerges is:

Assets = Owners’ Equity+Liabilities

This accounting equation can be used to record any business transaction, however complex. To pursue our accounting, assume that goods worth an additional sum of $350,000 were purchased in cash. The situation would now be:

Accounting-equivalence-concept-equation

Thereafter, goods worth $700,000 are sold for $900,000 cash, It is easy to make the necessary adjustments in the value of the goods, which will now come down from $750,000 to $50,000. But cash or other assets have now gone up by an amount of $900,000 resulting in an extra amount of $200,000 on the equities side as well. To whom does this extra amount of $200,000 accrue as property?

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Clearly, the banker cannot claim more than the original sum of the money lent to the enterprise, i.e. $300,000 simply because the transactions of the company have been profitable. So the outsiders’ equity or liability will remain constant at $300,000. Inevitably, we come to the conclusion that this sum belongs to the owners and should be recorded in the owners’ equity. The resulting situation will now be:

Accounting-equivalence-concept-equation-example

A few days after this transaction, the broker claims $50,000 as his commission for bringing this business to the enterprise and this sum is duly paid to him. Clearly, the banker will not accept anything less than $300,000 the original amount lent to the enterprise just because an expenditure has been incurred by the enterprise. The amount of outsiders equity or liability must, therefore, be maintained at its original figure of $300,000. The decrease in the assets due to an expense incurred to earn profit would, therefore, require to be viewed as a decrease in the owners’ equity. The final picture is indicated below:

example

This concept is technically stated as “for every debit, there is a credit.” Notice on passing that the comparison of owners’ equity at the beginning of the accounting period ($500,000) and at the end of it ($650,000) enables us to determine the profit for the period, viz. $150,000. As this represents the economist’s concept of profit, the accounting equation provides us with a method of profit measurement. Since the profit has not been withdrawn by the owner, we might construct the balance sheet at the end of the accounting period as follows:

Modren-Trader-balance-sheet

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