The Accounting Equation
Duality
Each transaction that a business enters into affects the financial statements in two ways.
For example; a business buys a vehicle for cash. The two effects on the business are:
- It has increased the vehicle assets it has at its disposal for generating income, and
- There is a decrease in cash available to the business.
As another example let's assume a business sells goods on credit. The two effects on the business are:
- The business has generated sales income, and
- The business is owed cash from its customer (called a receivable).
If the principles of duality are followed the accounting equation should always balance.
Double entry bookkeeping
The application of duality is double entry bookkeeping; whenever a transaction occurs both of the effects on the business must be recorded in the ledger accounts in order to maintain the accounting equation in the financial statements.
The two financial effects are recorded with one as a 'debit' and the other as a 'credit' to reflect the equal and opposite nature of the effects on the business.
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Created at 10/23/2012 2:04 PM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
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Last modified at 3/10/2014 2:57 PM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
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