Accounting Standards: Standards of Symmetry: Upholding Dual Aspect Principles in Accounting Practices
Therefore, as a result of the accrual concept, outstanding expenses and incomes are taken into consideration while preparing final accounts of a business entity. The concept is employed for accurate tracking and recording of business transactions. Let us start with the definition of the dual aspect concept, and then we will dive deeply into the details. According to the dual aspect principle of accounting, the company must record each financial transaction in two different accounts.
- In double-entry bookkeeping, each transaction will result in one account gaining something while the other losing something.
- Similarly, according to this concept, expenses are recognised in the same accounting period in which they help in earning the revenue whether cash is paid or not.
- The classification of debit and credit effects is structured in such a way that for each debit there is a corresponding credit and vice versa.
- Accounting concept refers to the basic assumptions which serve the basis of recording actual business transactions.
- For example, when a company borrows money from a bank, the accountant records an increase in assets (cash received) and an equal increase in liabilities (loan payable).
How the dual aspect concept ensures balanced financial statements 🔗
Here, Assets represent what a company owns, and Liabilities represent what a company owes to other parties. The dual concept ensures that this equation always remains in balance after each transaction. Suppose, after the completion of the first year of use, the company must record a 10% depreciation on the plant.
- While they may seem confusing at first, grasping their significance is crucial for anyone involved in accounting or finance.
- However, historical cost is the only one of these that needs to be considered in the context of FA2.
- An accountant sees the dual aspect principle as a safeguard for accuracy and completeness in financial records.
What is Securities Transaction Tax (STT)?
We will use some simple transactions to illustrate how both sides of the equation—debit and credit—are affected. Every business needs to record transactions using the dual aspect principle. According to the dual aspect concept, there are two aspects of accounting, one represents the assets of the business, and the other is the claim against these assets (i.e. capital and liabilities). Credit is the portion of transaction that accounts for the increase in income, liabilities and equity, and the decrease in assets and expenses.
Why Forensic Audit Was Initiated at IndusInd Bank?
In simpler terms, whenever something increases, something else must decrease by the same amount to maintain balance. This concept forms the basis of double-entry bookkeeping, which is the standard accounting system used by businesses to track their financial transactions. This principle provides a logical system that prevents errors and ensures the accounts stay accurate. Only through double-entry can a business prepare a complete balance sheet and guarantee the accounts reflect all aspects of a transaction.
Single Entry vs Double Entry
This would still not provide a fair presentation of the financial position or financial performance of the entity and, therefore, it is important that caution is exercised to avoid this as well. This concept states that revenue from any business transaction should be included in the accounting records only when it is realised. Managers use the information derived from the dual aspect principle to make informed decisions. Let’s take a look at a few real-world examples to understand how the dual aspect concept works in practice.
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. The dual aspect concept ensures consistency in account preparation and thus aids in the comparability of account statements across periods. It also allows the comparison of the financial statements of one entity with those of others. The dual aspect of double-entry accounting is a globally recognized and accepted accounting concept.
Only situations without non-recurring revenue or expenses, such as dividends, are appropriate for this concept. The dividends that the company pays are not taken into account for determining net revenue, which is the sum of the company’s earnings for the accounting cycle. This idea differentiates between money that pertains to shareholders of the firm and money that pertains to outsiders. Additionally, it is predicated on the notion that each transaction must be accompanied by an equivalent amount of activity on the other end, or a debit record, to calculate net income.
Financial Position Reflection
It assumes that all transactions can be expressed in monetary terms, which is not always the case. Non-monetary dual aspect concept of accounting transactions or those involving intangible values may not be accurately reflected. The dual aspect concept essentially means that for every value given, there must be a corresponding value received. In other words, every transaction has a two-fold effect – a credit and a debit of equal amounts.
The adoption of this concept enables organizations to prepare their books of accounts as well as get their financial statements audited. Moreover, only the accounts and statements that adhere to this concept would be acceptable to external stakeholders such as bankers, creditors, the government, and valuators, etc. Under IFRS, the company would record the asset at its fair value and recognize a corresponding liability or equity change.
Accounting Concept and Principles
Dual aspect in accounting and finance refers to the concept that every financial transaction affects at least two accounts in the accounting system, maintaining the balance in the accounting equation. It is one of the fundamental principles of accounting and the foundation for the double-entry bookkeeping system. Single aspect accounting records only one side of a transaction, typically used for simple cash-based systems. Dual aspect accounting records both sides, affecting at least two accounts, ensuring the accounting equation stays balanced and is essential for all formal and audited businesses. If management wants to have its financials audited, it must accept the dual aspect concept and maintain its accounting records using double-entry accounting.
Debit is the portion of transaction that accounts for the increase in assets and expenses, and the decrease in liabilities, equity and income. Dual Aspect Concept, also known as Duality Principle, is a fundamental convention of accounting that necessitates the recognition of all aspects of an accounting transaction. Dual aspect concept is the underlying basis for double entry accounting system. Dual entry refers to the process of recording every transaction in two accounts—one debit and one credit—ensuring both sides of every transaction are tracked and the total debits always equal total credits in the ledger.
Consistency implies that an entity should consistently applyaccounting principles and methods over time to ensure comparability offinancial information. Materiality, on the other hand, suggests thatinsignificant items need not strictly adhere to the dual-entry system, allowingfor practicality in accounting. The most important objective of running a business is to ascertain profit periodically. The determination of profit of a particular accounting period is essentially a process of matching the revenue recognised during that period and the costs to be allocated to the period to obtain the revenue. It is, thus a concept of matching revenues and expected costs, the residual amount being the net profit or net loss for the period.
Single-entry accounting records only one side of a transaction, whereas dual-entry (dual aspect) records both debit and credit sides, ensuring balanced, comprehensive records. In this case, the increase in cash (an asset) is matched by an increase in the owner’s equity (a form of liability to the business owner). Again, both sides of the transaction are balanced, keeping the accounting equation intact. A debit is an entry that increases the value of assets or expenses, and decreases the value of liabilities, equity, or revenue. On the other hand, a credit is an entry that increases the value of liabilities, equity, or revenue, and decreases the value of assets or expenses. 6) Money measurement concept assumes that all business transactions must be recorded in the books of accounts in terms of money.
