Definition and explanation
The dual aspect concept is the foundation principle of double entry system of accounting. It states that every accounting transaction has a dual effect – that is an equal and corresponding effect which impacts two different accounts. In essence, it means that every valid transaction in a business has both a debit and a credit effect. This concept ensures the accurate reporting of financial transactions and finally the accurate presentation of financial statements.
Since the dual aspect concept itself is based on the fundamental accounting equation, it is not possible to employ a true double entry accounting without adherence to this concept. In fact, the equation is a formal expression of the dual aspect concept. Accounting equation, in its basic form, can be expressed as follows:
Assets = Liabilities + Owner’s equity
Example to demonstrate the concept
As mentioned earlier, dual aspect concept involves the booking of two effects of each business transaction – a debit effect and a credit effect. Debits generally include increase in expenses and increase in assets and receivables. They can also include the reverse that is a reduction in liabilities. Credits involve an increase in income and an increase in capital and liabilities that impact the balance sheet. They can also denote a reduction in assets and receivables.
Let’s understand the concept with the help of an example.
ABC Inc. is a manufacturing entity. At the start of the current year, it purchases a new processing plant and machinery for $10,000 from XYZ Technologies Inc. on credit.
This transaction has a dual impact on Inc’s financial position. It impacts assets as there is an inflow of a new asset – the plant and machinery. At the same time, it also impacts liabilities as a new liability is created for payment towards the asset purchased. The accounting journal entry for this transaction under dual aspect concept would be recorded as follows:
Let’s extend this example further. Suppose, after the completion of first year of use, ABC Inc. must record a 10% depreciation on the plant and machinery. This too has a dual impact. Firstly, an expense or charge against profit would be created for the amount of yearly depreciation, which is a debit entry. Secondly, the asset value would be reduced, which is a credit entry. (You might want to read the rules of debit and credit article).
The proper accounting journal entry for this charge would be:
Benefits and usefulness of dual aspect concept
The adoption of dual aspect concept of accounting has several benefits. These include:
1. Accurate presentation of financial statements
By recording both sides, the concept ensures a correct representation of financial flow of each and every transaction the business conducts during a period. With this, financial records can be accurately maintained and resulting financial statements would reflect a true picture of organization’s financial performance and health.
2. Aids error tracing
In case trial balance and balance sheet do not tally, it will be relatively easy to trace and uncover mistakes or errors by tracing both effects of transactions when they are recorded under dual aspect.
3. Has global recognition
The dual aspect in double entry accounting is a globally recognised and accepted accounting concept. The adoption of this concept enables organisations to prepare their books of accounts as well as get their financial statements audited. Moreover, only the accounts and statements that adhere to dual aspect concept would be acceptable by external stakeholders such as bankers, creditors, government and valuators etc.
4. Aids comparability
Dual aspect concept ensures consistency in accounts preparation and thus aids comparability of account statements across periods. It also allows for comparison of financial statements of one entity with that of others.