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Every business transaction has double effect. There are two sides of every transaction. This is evident when we study the accounting term i.e., assets, capital and liabilities.

(i)                 Assets. These are the valuable articles owned by the business. Expenditure incurred in acquiring valuable things for the firm is assets. Special features of assets are that they are meant for use in the business and will increase the profit earning capacity of the business. Cash in hand, cash at bank, land and buildings, – furniture, vehicles, etc. are the assets of the firm. It has been an established fact that no business can be carried on without assets. Business as a separate entity and going concern must possess certain assets.

(ii)               Capital. Capital is that part of wealth which is used for further production. In the context of dual aspect concept capital supplies necessary funds to the business to purchase certain assets. In the absence of capital, there will be no funds with the enterprise and thus the question of acquiring assets does not arise. If we take it from business point of view, proprietor’s capital is the liability of the business. Capital received in cash represents two accounts capital and cash. Capital is the proprietor’s claim against the assets of the business and the cash is the asset of the business itself. As the amount of the two accounts are the same, we can safely conclude that : 

                                                                      Capital= Assets 

(iii)             Liabilities. If the capital invested by the proprietor falls short the business has to borrow funds. Thus the loan on the one side is the liability of the firm and on the other side it will be in the form of cash or other assets. The amount represented by both loan and assets are equal. This transaction enables us to think about the two aspects so it is called dual aspect concept or double entry system. All the assets of the business are acquired by the funds contributed by the proprietors and creditors, so it is always correct to conclude as under: 

                                                                  Capital +Liabilities =Assets

The relationship between assets, liabilities and capital is at present known as Accounting Equation which can also be expressed as under :

                                                                 Assets = Capital +Liabilities

Or

                                                                Capital =Assets – Liabilities

Or

                                                                  Liabilities =Assets- Capital

 

We record all the business transactions on the basis of dual aspect and call the system as double entry system.