Let us start with the definition of the dual aspect concept, and then we will dive deeply into the details. According to the dual aspect principle of accounting, the company must record each financial transaction in two different accounts. Double-entry accounting depends on this idea of the dual aspect concept in accounting. These bookkeeping structures need to obtain accurate financial records. Let us dive deeper into this concept and learn all the aspects of this accounting concept.
Did you know? According to the dual aspect idea, every business transaction should have a double entry in the bookkeeping system, also known as the duality principle in accounting. The dual aspect concept records every transaction under the two fundamental categories of credit and debit.
What Is Dual Aspect Concept?
Each activity has a proportional and equivalent consequence in the double-entry bookkeeping system, affecting two account numbers. These 2 accounts keep track of every money transfer. The double-entry system records transactions as debit and credit balances. Every deduction should match all crediting since crediting in one account cancels out a deficit in another.
The accounting procedure was standardised using the dual aspect concept in the accounting approach, which also improved the calibre of the financial statements produced and made it easier to spot errors. The double-entry book accounting system categorises the accounting division further into seven distinct categories. They are equity, revenues, spending, liabilities, profits and losses.
Contrary to the single-entry bookkeeping system, which only records one side of a transaction, such as the sales, this framework also documents the other activity, which would be the receipt of payments.
This idea divides each transaction into two halves and is the foundation for double-entry accounting. Below is a detailed explanation of these.
- Debit: In this Double Entry System, the term "debit" indicates an increase in resources and expenditures. It also means a decline in the liabilities, earnings, and capital in itself.
- Credit: In the dual aspect of accountancy, credit indicates a reduction in property and expenditure. It also shows any rise in liabilities, earnings, or equity a deal brings.
Also Read: What are the Limitations of Accounting?
Real-World Example of Double-entry System
A cake shop makes a credit purchase of several refrigerated transport vehicles worth ₹3,00,000. Those modern vehicles have an anticipated usable life of ten years, and the shopkeeper will use them in commercial activities. The accountant must enter the details of the purchase of new vehicles on credit in the appropriate accounts. They make a debit entry to the fixed assets account to reflect the purchase of ₹3,00,000. To reflect the credit acquisition, the company makes a credit entry of ₹3,00,000 to accounts payable. The debit entry raises the balance of the assets, while the credit entry raises the liabilities by an identical sum. On the other hand, if it was a cash purchase, they would debit the fixed asset account and credit the cash account.
Features of Dual Aspect Accounting
It is crucial to remember that each transaction contains the following characteristics to understand dual aspect accounting effectively.
- While simultaneously boosting another resource, it diminishes one.
- Similarly, it raises one liability while decreasing another.
- Both a resource and the corresponding liability rise at the same time.
- On the other hand, as an asset decreases, the corresponding liability likewise decreases.
Dual Aspect Accounting Equation,
The characteristics of the dual aspect principle of accounting could be challenging to comprehend unless one illustrates it with a formula and useful examples. The fundamental accounting formula is as follows in accordance with this idea.
Formula: A = E L
- A refers to an asset.
- E represents equity.
- L represents liabilities.
In the above equation, assets serve as both fixed and present assets. In addition, liabilities include both current and long-term liabilities.
Dual Aspect Concept Examples
Because accountancy is a practical subject, it is necessary for learners to comprehend the principles with examples because doing so improves their understanding. Following are some examples that can explain dual aspect concepts much more clearly. Let's look at it in detail.
Issuing an Invoice to a Client:
Its revenue statement's initial entry shows a rise in sales. Whereas the shift in revenue, owing to the growth in sales company records in retained income, the AC asset on the financial statements also increases. This belongs to the equity component of an income statement.
Receiving an Invoice From a Provider:
The first part of this item documents a rise in an asset or expense account. One may find this in the balance sheet for resources or the financial statements for expenditure. The account payable responsibility is increased in this item's second part. Additionally, this shift in revenue that the company records as a result of expenditure is included in retained profits under the capital heading in an income statement.
Whereas this example demonstrates a situation where one must provide explanatory instances to all the users of the financial statements in order to understand accounting methods.
Think about a Mr Y who starts his firm with ₹2 lakhs as capital. The dual aspect concept reveals the following in this case.
When Mr Y buys items worth ₹30,000 from some other company, and then there is a change in the record. Following this transaction, the accounting looks like this.
Also Read: What is Accounting Information?
Related Types of Accounting Concepts
Numerous accounting principles, like dual aspect concept accounting, are essential for a thorough understanding of the topic. Let’s explain these key ideas below, along with others.
According to this theory, the company must recognise and record the income when it is actually realised rather than when it is actually received. Furthermore, related expenses are not kept aside until payment but rather recorded as and when it incurs. When creating income statements of costs and revenues, they have to adjust and acknowledge this principle properly.
Business Entity Concept:
This concept's basic tenet is that a firm exists independently of all of its shareholders or financial backers. It emphasises how crucial it is for businesses to keep accurate transactional entries. In this case, a proprietor is regarded as the borrower.
According to this idea, the company must record the fixed assets at their initial purchase price. The applicable cost is the sum that the company pays to purchase an asset. Each accounting of this property that is to come is dependent on this.
Going Concern Concept:
This emphasises a key idea that has to do with the sustainability of a commercial enterprise: the profit of a company. As a result, every business that is profitable can keep operating and is referred to as a going concern. Parallel to the recording against liquidation, financial statements are kept in this instance as going concerns.
Money Measurement Concept:
It is a simple accounting principle stating that in each transaction involving money, the company must record the same in the books of accounts. Importantly, this concept calls for the company to document all transactions only in monetary units.
As per the dual aspect concept, every financial transaction has two entries. A debit for every credit, meaning if you debit one account, the other account is credited, and vice versa. This indicates the company needs two accounts to record each business transaction in the accounting records. The double entry system of bookkeeping is dependent on this principle.
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