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DUAL ASPECT CONCEPT |
and this follows from the basic accounting equation which is: |
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ASSETS= LIABILITIES + OWNERS’ EQUITY |
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Assets are the resources owned by a business Liabilities are the rights of the creditors, which represent debts of the business Owners Equity represents the rights of the owner |
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UNDERSTANDING THE MECHANISM OF THE DUAL ASPECT CONCEPT |
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To be able to understand clearly this dual purpose or double entry, let’s go through the below step-by-step illustration: Its start with an Individual called Y, who puts in money for shares in a newly formed company called ABC. ABC starts its business activities by the initial purchase of land and inventory. Subsequently, it also receives incomes for services rendered and pay expenses and ultimately leading to the paying of dividend to the shareholder Y |
ILLUSTRATIONS:
(1) Y deposits $25,000 in a bank account in the name of Company ABC in return for shares of stock in the company.
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ASSETS |
OWNERS EQUITY |
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Bank Account |
Paid Up Share Capital re: investment by stockholder |
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C/f |
+ $25,000 |
+$25,000 |
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Notes: The Accounting Equation: Assets= Liabilities + Owners Equity balances when Y an individual pays in the bank for shares in the company. Both Bank account and the corresponding entry-Paid Up Capital Account has increased by $25,000 |
(2) The Company paid $20,000 for purchase of a piece of land.
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ASSETS Bank |
ASSETS Land |
OWNERS EQUITY Paid Up Share Capital |
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B/f |
$25,000 |
$25,000 |
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C/f |
$5,000 |
$20,000 |
$25,000 |
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Notes: In this case, in the Assets Category, bank account has being reduced by $20,000 which is equally represented by the company possessing a land that costs $20,000. What’s important is that the accounting equation balances. |
(3) During the month, the company purchased supplies for $1,500 and agreed to pay the supplier in the near future (on account).
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ASSET Bank |
ASSETS Land |
ASSETS Stocks |
LIABILITIES Accounts Payable |
OWNERS EQUITY Paid Up Share Capital |
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B/f |
$5,000 |
$20,000 |
$25,000 |
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C/f |
$5,000 |
$20,000 |
$1,500 |
$1,500 |
$25,000 |
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Notes: Here, the purchases of supplies has increased the company’s stock by $1,500 with a corresponding increase in accounts Payable |
(4) The company provided services to customers, earning fees of $8,000 and received the amount in cash
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ASSET Bank |
ASSETS Land |
ASSETS Stocks |
LIABILITIES Accounts Payable |
OWNERS EQUITY Paid Up Share Capital |
OWNERS EQUITY Retained Earnings |
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B/f |
$5,000 |
$20,000 |
$1,500 |
$1,500 |
$25,000 |
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+$8,000 |
+$8,000 |
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C/f |
$13,000 |
$20,000 |
$1,500 |
$1,500 |
$25,000 |
$8,000 |
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Notes: Due to the receipt of money from customer, bank account increased by $8,000 with a corresponding increase in Income (owners’ equity) hence the accounting equation still balances |
(5) The Company paid the following expenses: wages, $2,000; rent, $1000; utilities, $500; and miscellaneous, $300.
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ASSET Bank |
ASSETS Land |
ASSETS Stocks |
LIABILITIES Accounts Payable |
OWNERS EQUITY Paid Up Share Capital |
OWNERS EQUITY Retained Earnings |
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B/f |
$13,000 |
$20,000 |
$1,500 |
$1,500 |
$25,000 |
$8,000 |
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-$2,000 -$1,000 -$500 -$300 |
-$2,000 -$1,000 -$500 -$300 |
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C/f |
$9,200 |
$20,000 |
$1,500 |
$1,500 |
$25,000 |
$4,200 |
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Notes: Here, the company is paying off the expenses of $3,800 ($2,000+$1,000+$500+$300) Which reduces the bank account by $3,800 with a corresponding figure in the Retained Earnings Assets($30,700) =Liabilities($1,500) + Owners Equity ($29,200) |
(6) The Company paid $1,500 to creditors during the month.
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ASSET Bank |
ASSETS Land |
ASSETS Stocks |
LIABILITIES Accounts Payable |
OWNERS EQUITY Paid Up Share Capital |
OWNERS EQUITY Retained Earnings |
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B/f |
$9,200 |
$20,000 |
$1,500 |
$1,500 |
$25,000 |
$4,200 |
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-$1,500 |
-$1,500 |
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C/f |
$7,700 |
$20,000 |
$1,500 |
$0 |
$25,000 |
$4,200 |
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Notes: The company pays off the amount due to its account payable. This therefore Reduces the bank account by $1,000 with a corresponding reduction in liabilities Assets($29,200) =Liabilities($0) + Owners Equity ($29,200) |
(7) At the end of the month, the cost of supplies on hand is $500, so $1,000 of supplies were used.
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ASSET Bank |
ASSETS Land |
ASSETS Stocks |
LIABILITIES Accounts Payable |
OWNERS EQUITY Paid Up Share Capital |
OWNERS EQUITY Retained Earnings |
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B/f |
$7,700 |
$20,000 |
$1,500 |
$0 |
$25,000 |
$4,200 |
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-$1,000 |
-$1,000 |
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C/f |
$7,700 |
$20,000 |
$500 |
$0 |
$25,000 |
$3,200 |
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Notes: From the stock account, $1,000 have been consumed to generate the earlier Mentioned income of $8,000 so this has to be charged out. Hence, the stock Account is reduced by $1,000 and the corresponding consumption of stocks is charged to owners equity side. Assets($28,200) =Liabilities($0) + Owners Equity ($28,200) |
(8) At the end of the month, the Company pays $2,000 to stockholders
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ASSET Bank |
ASSETS Land |
ASSETS Stocks |
LIABILITIES Accounts Payable |
OWNERS EQUITY Paid Up Share Capital |
OWNERS EQUITY Retained Earnings |
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B/f |
$7,700 |
$20,000 |
$500 |
$0 |
$25,000 |
$3,200 |
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-$2,000 |
-$2,000 |
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C/f |
$5,700 |
$20,000 |
$500 |
$0 |
$25,000 |
$1,200 |
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Notes: Similarly, bank account is used up by $2,000 to be paid to the stockholders which results in a corresponding decrease in Owners’ equity. However, the accounting equation always balance: In this case: Assets ($26,200)= Liabilities ($0) + Owners Equity ($26,200) |
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