What is the Dual Aspect Concept?
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 in return for the sold item. This makes a transaction dual in nature, affecting two accounts simultaneously and hence it should be registered likewise.
- 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-entry 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 bookkeeping in accounting.
How Does Dual Aspect Concept Work?
The dual aspect concept in accounting lays the very foundation on which every transaction is recorded in the books of accounts in most organisations. In simple words, the dual aspect concept brings into notice 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. 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 other losing something.
As such, every entry in accounting records will have a corresponding opposing entry. Under double-entry booking-keeping, every transaction has a debit and credit effect. 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 debiting. At the same time, Amazon’s bank account will gain $500. This stage is called the crediting.
All publicly traded companies and most private companies use double-entry accounting. If a company’s management wants an auditor to audit its financial statements, the management has to use double-entry accounting. This is the only format most auditors accept.
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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. In the dual aspect concept, after debiting $100 from your account, you will also credit $100 to your assets account like a $100 Google Play card.
This 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. This is why small organizations and individuals still use single-entry accounting. Like we explained earlier, in single-entry, we only take into account 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 the 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 sourced for funding the business lent by the business’s owner. This requires every transaction to be debited and credited so that the balance sheet calculations reflect the accounting equation below –
Assets = liabilities + Owner’s equity
Double-entry is required for all publicly traded companies. This 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 2 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 dual aspect concept is the most widely accepted norm for auditing purpose.
|Used by individuals and small businesses.||Used by most prominent businesses and all publicly-traded companies.||Used by multinational corporations.|
|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.|