Understanding the Dual Aspect Concept

There are two sides to every transaction. When a buyer pays for an item, the seller receives payment. Both sides of the equation must be represented in a business’s financial accounts. This idea is represented in accounting with the dual aspect concept.

What is dual aspect in accounting?

The dual aspect concept forms the basis of the double-entry accounting method. This requires that each business transaction be recorded in two separate accounts. According to the dual aspect concept, every transaction impacts the business in two ways which must be equal and opposite. When something (like cash or inventory) is given, someone (like the buyer or seller) will receive it. In financial accounts, this is represented with a system of equal but opposite matching credits and debits. For each debit recorded, there is a corresponding credit of the same amount.

How does dual aspect concept accounting work?

To better understand how dual aspect accounting works, it helps to go back to the accounting equation.

The accounting equation lays the foundation for financial statements including the balance sheet. On the balance sheet, the listed assets must equal the sum of all total liabilities and equity. Every business transaction will involve some combination of assets, liabilities, and equity.

Each transaction is recorded in two accounts. If A takes out a loan for $50 from B, both A’s and B’s accounts are impacted. A’s account gains $50, while B’s account loses $50. There’s a duality to each transaction whether it involves a loan or purchase. Money that comes out, must go in somewhere else.

Auditors will only accept accounting records drawn up with the double-entry accounting method, so it’s important to understand the dual aspect concept.

Single vs dual aspect concept accounting

The dual aspect account concept is required for formal audits and publicly traded companies. However, some small businesses will use the single-entry method instead. This simply records a list of credits and debits to a single account, rather than showing a balance sheet with all assets, liabilities, and equity. It can be used to create a cash-basis income statement. It’s also possible to find multi-entry accounts when greater transactional complexity is involved, though this can be time-consuming.

Dual aspect concept examples

You can find out more about double-entry accounting and how to record journal entries in our guides. The dual aspect concept itself is quite simple – here are a few examples.

Laura invests $5,000 in Company ABC.

1. Company ABC receives $5,000 into their cash accounts.

2. Laura has $5,000 deducted from her bank account.

Company ABC purchases a new computer for $1,000.

1. Company ABC deducts $1,000 from its bank account.

2. Company ABC records a $1,000 credit to its asset account to reflect this purchase.

Company XYZ sells a computer to Company ABC for $1,000

1. Company XYZ receives $1,000 in its accounts receivable to reflect the transaction.

2. Company ABC deducts $1,000 from its bank account.

All three examples involve money flowing in and out of Company ABC’s accounts, but as you can see each transaction involves two sides.

It’s helpful to set up an automated accounting system to make sure you’re recording these transactions in all relevant accounts as they happen. Although dual aspect accounting is straightforward for most transactions, it’s vital to keep on top of each credit and debit in real time to keep your balance sheet organized. GoCardless can help, integrating with over 350 partners including top accounting and invoicing software like Xero and Salesforce for a joined-up workflow. As invoices are paid and payments received in your bank account, your financial records are automatically updated accordingly.

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GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.