Understanding Dual Aspect Concept

Understanding Dual Aspect Concept

Every accountant in the accounting firm in Johor Bahru has most probably heard of the dual aspect concept. This concept states that there must be recordation in two separate accounts for every transaction and it is the foundation for double-entry accounting. For the companies to generate accurate financial statements, all accounting frameworks have stated that all companies should follow double-entry accounting.

The dual aspect concept comes from the derivation of the accounting equation below (Also see Applying the Accounting Equations in Various Businesses):

Assets = Liabilities + Shareholders’ equity

You can see the relationship between the elements above clearly in your company’s balance sheet, in which the sum of assets should be equal to the amount of liabilities and shareholder’s equity. Most of the business transaction will somehow affect the balance sheet. This is why one or more parts of a transaction will include assets, liabilities or shareholder’s equity. Listed below are a few examples:

When the company receives an invoice from its supplier

When this happens, there will be an increase in the expense account or asset account. This means that one part of the transaction will appear in the profit and loss statement or the balance sheet. When the company records the expense, there will be a change in its income, which will appear in the balance sheet as retained earnings in the equity section (Also see What is the Relationship between the Profit and Loss Statement and the Balance Sheet?). If the company wants to offset the entry, there will be an increase in the accounts payable, which is a form of liability in its balance sheet.

When the company issues an invoice to its client

When this occurs, there will be an increase in sales. This means that one part of the transaction will appear in the profit and loss statement. When the company records the sale, there will be a change to its income, which will appear in the balance sheet as retained earnings in the equity section. If the company wants to offset the entry, there will be an increase in the accounts receivable, which is a form of asset in its balance sheet (Also see Understanding Asset Conversion Cycle).

If a company choose not to follow the dual aspect concept, it will be using the single-entry accounting. It will need a chequebook for it to record the transactions. Yet, it cannot use the chequebook to generate a balance sheet. Hence, the company can only create an income statement by using the cash basis of accounting.

If the business owners have the intention of getting their financial statements audited (Also see Introduction to Audit Strategy), they must implement the dual aspect concept and keep their company’s accounting records through double-entry accounting. The auditors will not issue audit opinions on the financial statements unless they do so because only double-entry accounting records are acceptable for audit purposes.