Accounting Concepts- 5.Dual-aspect Concept, Equation Concept or Accounting Equation Concept :
Every business transaction always results in receiving of some benefit of some value and giving of some other benefit of equal value. For instance, when a business purchases goods for cash, it receives goods of some value and gives cash of equal value. Similarly, when it sells goods for cash, it receives cash of some value and gives goods of equal value. Thus every business transaction involves dual or double aspects of equal value. So, in accounting, a record is made of the dual or two aspects of each transaction.
The dual aspect or the equation concept can also be explained in another way. Each transaction of a concern has dual or double effects, viz.,
(a) an increase in the assets and a corresponding increase in the liabilities or the proprietor's capital or
(b) a decrease in the assets and a corresponding decrease in the liabilities or the proprietor's capital or
(c) a decrease in some asset or assets and a corresponding increase in some other asset or assets without any change in the liabilities or
(d) a decrease in some liability or liabilities and a corresponding increase in some other liability or liabilities without any change in the assets. For instance, when the proprietor invests some capital in the business, there is an increase in the assets of the business and there is also a corresponding increase in the proprietor's capital. When the business buys some goods on credit, there is an increase in the assets of the business, and there is also a corresponding increase in the liabilities of the business. When the proprietor withdraws some amount from the business for his private expenses, there is a decrease in the assets of the business, and there is also a corresponding decrease in the proprietor's capital. When the business pays off one of its creditors, there is a decrease in the assets of the business and there is also a corresponding decrease in the liabilities of the business. If the business sells goods for cash, there is a decrease in the asset, viz., goods, and there is a corresponding increase in another asset, viz., cash. When the business gives a promissory note or a bill payable to one of its creditors, there is a decrease in one liability, viz., creditors, and there is a corresponding increase in another liability, viz., bills payable. Thus, each business transaction undertaken by a concern has a two-fold effect, an effect on its assets on the one hand and an effect on its liabilities or the proprietor's capital on the other, or an effect on some asset or assets and an equal effect on some other asset or assets, or an effect on some liability or liabilities and an equal effect on some other liability or liabilities. As such, each transaction will always result in equality of assets and liabilities, and at any point of time, the total assets of the concern will be equal to its total liabilities plus the proprietor's capital. In short, in the books of any business, at any moment of time,.
assets = liabilities + proprietor's capital.
The accounting equation, assets = liabilities + capital, given above, can also be expressed in two other ways. They are:
1. Assets - Liabilities = Capital
2. Assets - Capital = Liabilities
This equation or accounting equation, viz., assets = liabilities + proprietor's capital can be explained with a few examples.
Suppose the business receives Rs.30,000 from the proprietor as a capital. In this case, on the one hand, the assets of the business increase by Rs.30,000 on account of the receipt of cash, and on the other hand, the capital of the proprietor increases by Rs.30,000. If the two-fold effect of this transaction is put in the form of an accounting equation, the equation will be:
Assets = Liabilities + Capital
Rs. Rs. Rs.
Cash
30,000. =. 0 30,000
Now let us suppose the business borrows Rs.10,000 from some lender. In this case, the assets of the business increase by Rs.10,000 on account of the receipt of cash, and the liabilities of the business also increase by Rs.10,000 because of the borrowing of loan. If the dual effect of this transaction is recorded, the accounting equation will be:
The dual aspect concept or the accounting equation concept is very useful in accounting. It forms the very basis for recording every business transaction in the books of a concern.
Again, the accounting equation, assets - liabilities = capital, helps a concern to determine it's profit or loss. At any point of time, the capital of the proprietor of a business is it's assets minus it's liabilities. On the basis of the above accounting equation, the capital of the proprietor can be calculated at various points of time, say, at the beginning of the accounting year and at the end of the accounting year. The capital of the proprietor calculated at two different points of time (viz., at the beginning of the accounting year and at the end of the accounting year) can be compared and the profit or loss of the business during the accounting year can be easily ascertained. If the proprietor's capital at the end of the accounting year is more than his capital at the beginning of the accounting year, the difference can be taken as the profit for the year. On the other hand, if the proprietor's capital at the end of the accounting year is less than his capital at the beginning of the accounting year, the difference can be taken as the loss for the year.
Every business transaction always results in receiving of some benefit of some value and giving of some other benefit of equal value. For instance, when a business purchases goods for cash, it receives goods of some value and gives cash of equal value. Similarly, when it sells goods for cash, it receives cash of some value and gives goods of equal value. Thus every business transaction involves dual or double aspects of equal value. So, in accounting, a record is made of the dual or two aspects of each transaction.
The dual aspect or the equation concept can also be explained in another way. Each transaction of a concern has dual or double effects, viz.,
(a) an increase in the assets and a corresponding increase in the liabilities or the proprietor's capital or
(b) a decrease in the assets and a corresponding decrease in the liabilities or the proprietor's capital or
(c) a decrease in some asset or assets and a corresponding increase in some other asset or assets without any change in the liabilities or
(d) a decrease in some liability or liabilities and a corresponding increase in some other liability or liabilities without any change in the assets. For instance, when the proprietor invests some capital in the business, there is an increase in the assets of the business and there is also a corresponding increase in the proprietor's capital. When the business buys some goods on credit, there is an increase in the assets of the business, and there is also a corresponding increase in the liabilities of the business. When the proprietor withdraws some amount from the business for his private expenses, there is a decrease in the assets of the business, and there is also a corresponding decrease in the proprietor's capital. When the business pays off one of its creditors, there is a decrease in the assets of the business and there is also a corresponding decrease in the liabilities of the business. If the business sells goods for cash, there is a decrease in the asset, viz., goods, and there is a corresponding increase in another asset, viz., cash. When the business gives a promissory note or a bill payable to one of its creditors, there is a decrease in one liability, viz., creditors, and there is a corresponding increase in another liability, viz., bills payable. Thus, each business transaction undertaken by a concern has a two-fold effect, an effect on its assets on the one hand and an effect on its liabilities or the proprietor's capital on the other, or an effect on some asset or assets and an equal effect on some other asset or assets, or an effect on some liability or liabilities and an equal effect on some other liability or liabilities. As such, each transaction will always result in equality of assets and liabilities, and at any point of time, the total assets of the concern will be equal to its total liabilities plus the proprietor's capital. In short, in the books of any business, at any moment of time,.
assets = liabilities + proprietor's capital.
The accounting equation, assets = liabilities + capital, given above, can also be expressed in two other ways. They are:
1. Assets - Liabilities = Capital
2. Assets - Capital = Liabilities
This equation or accounting equation, viz., assets = liabilities + proprietor's capital can be explained with a few examples.
Suppose the business receives Rs.30,000 from the proprietor as a capital. In this case, on the one hand, the assets of the business increase by Rs.30,000 on account of the receipt of cash, and on the other hand, the capital of the proprietor increases by Rs.30,000. If the two-fold effect of this transaction is put in the form of an accounting equation, the equation will be:
Assets = Liabilities + Capital
Rs. Rs. Rs.
Cash
30,000. =. 0 30,000
Now let us suppose the business borrows Rs.10,000 from some lender. In this case, the assets of the business increase by Rs.10,000 on account of the receipt of cash, and the liabilities of the business also increase by Rs.10,000 because of the borrowing of loan. If the dual effect of this transaction is recorded, the accounting equation will be:
Assets = Liabilities + Capital
Rs. Rs. Rs.
Cash
30,000 - 10,000 = 10,000 + 30,000
Suppose the business buys goods worth Rs.15,000 from some supplier on credit. In this case, the assets of the business increase by Rs.15,000 on account of receipt of goods and the liabilities also increase by Rs.15,000 on account of the purchase of goods on credit. If the two-fold effect of this transaction is recorded, the accounting equation will be:
Assets = Liabilities + Capital
Rs. Rs. Rs.
Cash + Stock. Loan + Creditors + Capital
40,000 + 15,000 = 10,000 + 15,000. + 30,000
In case the business pays Rs.5,000 to the creditor on account, the assets of the business will decrease by Rs.5,000 because of the payment of cash, and the liabilities of the business also will decrease by Rs.5,000 on account of the part payment made to the creditor. If the dual effect of this transaction is recorded, the accounting equation will be:
Assets = Liabilities + Capital
Rs. Rs. Rs.
Cash + Stock Loan + Creditors + Capital
35,000 + 15,000 = 10,000 + 10,000. + 30,000
Again, the accounting equation, assets - liabilities = capital, helps a concern to determine it's profit or loss. At any point of time, the capital of the proprietor of a business is it's assets minus it's liabilities. On the basis of the above accounting equation, the capital of the proprietor can be calculated at various points of time, say, at the beginning of the accounting year and at the end of the accounting year. The capital of the proprietor calculated at two different points of time (viz., at the beginning of the accounting year and at the end of the accounting year) can be compared and the profit or loss of the business during the accounting year can be easily ascertained. If the proprietor's capital at the end of the accounting year is more than his capital at the beginning of the accounting year, the difference can be taken as the profit for the year. On the other hand, if the proprietor's capital at the end of the accounting year is less than his capital at the beginning of the accounting year, the difference can be taken as the loss for the year.
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