What is the Dual Aspect Concept?
The dual aspect concept states that since every transaction has a dual effect, the accounting records must reflect the same to show the accurate movement of funds. For instance, a buyer pays cash in return for a purchased item while the seller gains cash for the sold item. It makes a transaction dual, affecting two accounts simultaneously, and hence it should be registered likewise.
Table of contents
- What is the Dual Aspect Concept?
- The Dual Aspect Concept states that every transaction should be recorded in two different accounts to show the funds’ accurate movement
- The concept acts as the foundation for double-entryDouble-entryThe double-entry accounting system refers to the double effect of every journal entry. It is based on the dual aspect i.e. Debit and Credit and this principle states that for every debit, there must be an equal and opposite credit. bookkeeping. If you want to get your financial statements audited, you must use a dual-entry accounting system.
- Apart from double-entry, we have single-entry bookkeeping and multiple-entry bookkeepingBookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments. in accounting.
How Does Dual Aspect Concept Work?
The dual aspect concept in accounting lays the foundation on which every transaction is recorded in the books of accounts in most organizations. In simple words, the dual aspect concept notices how every single transaction ends up affecting two accounts. For example, A takes a loan of $100 from his friend B through internet banking.
The two accounts getting affected here are the bank accounts of A and B. After the transaction, $100 will get deducted from B’s bank account while A’s bank account will gain $100. Hence, the dual aspect concept requires transactions to be recorded in two different accounts. The dual aspect concept forms the basis of double-entry book-keeping in accounting. In double-entry bookkeeping, each transaction will result in one account gaining something while the other losing something.
Under double-entry booking-keeping, every transaction has a debit and credit effect. Every entry in accounting records will have a corresponding opposing entry. Suppose you buy $500 worth of stationery from Amazon using a debit card. $500 will get deducted to fund the purchase. This process is called debitingDebitingDebit represents either an increase in a company’s expenses or a decline in its revenue. . At the same time, Amazon’s bank account will gain $500. This stage is called the crediting.
All publicly traded companiesPublicly Traded CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market. and most private companies use double-entry accounting. It is the only format most auditors accept. If a company’s management wants an auditor to audit its financial statements, the management has to use double-entry accounting.
Example of Dual Aspect Concept of Accounting
Let’s understand this concept in detail using another example.
Let’s say you buy a google play card worth $100 by paying $100. You will only debit $100 from your accounting books in a single-entry system as it is not based on the dual aspect concept. After debiting $100 from your account in the dual aspect concept, you will also credit $100 to your assets account like a $100 Google Play card.
It verifies the transaction by showing two sides of the coin. One is the side where money has been debited from your bank account, and the other is the side where the $100 Google Play.
Single, Double and Multiple Entry in Accounting
Single-Entry in Accounting
Although the dual aspect concept is superior, it takes a lot more time and is much more complicated. It is why small organizations and individuals still use single-entry accounting. As we explained earlier, inThe Single Entry System is an accounting approach under which every accounting transaction is recorded with only a single entry towards the results of the business enterprise, shown in the statement of income of the company. single-entrySingle-entryThe Single Entry System is an accounting approach under which every accounting transaction is recorded with only a single entry towards the results of the business enterprise, shown in the statement of income of the company., we only consider one aspect of a transaction. The recorded entry reflects either a debit or a credit record.
The dual aspect concept is the building block for double-entry bookkeeping. Double-entry is based on the principle that an organization’s assets are equal to its liabilities and owner’s equity. Owner’s equity is the capital sources for funding the business lending by the business’s owner. It requires every transaction to be debited and credited so that the balance sheet calculations reflect the accounting equationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. below –
Assets = liabilities + Owner’s equity
Double-entry is required for all publicly traded companies. It is because annual reports of publicly traded companies must contain audited financial statements formed using double-entry booking.
Multi-Entry in Accounting
Some companies use more than two accounts to keep track of their finances. This adds more details and complexity. It takes much more time than single-entry or even double-entry accounting.
Single-Entry vs Dual-Entry vs Multi-Entry Accounting
Let us understand the different bookkeeping forms to see why the dual aspect concept is the most widely accepted norm for auditing purposes.
|Used by individuals and small businesses.||They are used by most prominent businesses and all publicly-traded companies.||Multinational corporations use them|
|Mistakes are hard to find and resolve.||Mistakes are easy to find and resolve.||Mistakes are resolved efficiently and quickly.|
|Only a small number of transactions can be recorded accurately||A large volume of transactions can be recorded accurately.||An infinite number of transactions can be recorded with pinpoint accuracy.|
|Book-keeping is easy and fast. You don’t need to hire a professional.||Book-keeping is slow. You need to hire a professional to ensure accuracy.||Book-keeping is extremely slow. You need to hire a team of professional accountants|
|Auditing is difficult.||Auditing is easier.||Auditing is easier.|
This has been a guide to What is Dual Aspect Concept in Accounting and its definition. Here we discuss how it works along with examples. You may also have a look at the following articles to learn more –