Dual Aspect Concept – Accounting is a language of the business. Financial statements prepared by the accountant communicate Financial information to the various stakeholders for decision-making purpose. Therefore, it is important that Financial statements prepared by different organizations should be prepared on uniform basis. Also there should be consistency over a period of time in the preparation of these Financial statements. If every accountant starts following his own norms and notions for accounting of different items then there will be an utter confusion.
Every Transaction has two effects: Debit and Credit. Both are opposite and equal also known as Double Entry System. Accounting equation has been derived on the basis of dual aspect concept as under:
- Assets = Liabilities + Equity (Balance Sheet Equation)
- Net Profit = Income – Expenses (Profit & Loss Equation)
Dual Aspect Concept
Dual Aspect Concept in Detailed – This concept is the core of double entry book-keeping. Every transaction or event has two aspects:
- It increases one Asset and decreases other Asset;
- It increases an Asset and simultaneously increases Liability;
- It decreases one Asset, increases another Asset;
- It decreases one Asset, decreases a Liability.
- It increases one Liability, decreases other Liability;
- It increases a Liability, increases an Asset;
- It decreases Liability, increases other Liability;
- It decreases Liability, decreases an Asset.
So every transaction and event has two aspects.
This gives basic accounting equation :
Equity (E) + Liabilities (L) = Assets (A)
Equity (E)= Assets (A) – Liabilities(L)
Or, Equity + Long Term Liabilities + Current Liabilities = Fixed Assets + Current Assets
Or, Equity + Long Term Liabilities = Fixed Assets + (Current Assets – Current Liabilities)
Or, Equity = Fixed Assets + Working Capital – Long Term Liabilities
Whatever is received as funds is either expended (Expenses) – Debited to Profit & Loss Account
Or Lost – Losses are transferred to Capital Account
Or saved – Shown on the Assets side of the Balance Sheet
Therefore, Capital + Income/Profits + Liabilities = Expenses + Net Loss + Assets Or, Capital + Income – Expenses + Net Profits = Assets – Liabilities
Since the net profit / loss is transferred to equity, the net effect is
Equity + Liabilities = Assets