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.
Alternatively:
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) or 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 Recommended
Activity RatioAccounting EquationFund Flow StatementTrial BalanceAccounting ConceptCapital Expenditure
