# Dual Entity Concept

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# Constituents of the Accounting Equation

Consider the following accounting equation

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (5,000) = Cash (13,000) + Furniture (25,000) + Stock (5,000) + Bank (60,000)
+ M/s Bharat & Co (2,000)

The accounting equation being a mathematical equation should be a statement of equality between two expressions. Thus "Capital + Liabilities" is an expression and "Assets" is another expression.

An expression is formed by one or more terms combined together using the mathematical operations of addition and subtraction.

Thus the sub divisions into which we break down the expressions within the accounting equation would be an equivalent of terms in mathematics. Each such term in the equation is nothing but an element of accounting.

We should understand that certain elements are part of the expression called Liabilities, certain other are part of the expression called Assets. Where Liabilities are segregated as "Capital" and "Liabilities", each of these would be an expression in itself.

# • Effect of a Transaction

Every business transaction which is to be considered for accounting i.e. every accounting transaction has its effect on the elements (called accounts or account heads) of accounting thus affecting the constituents of the accounting equation.

## » Illustration:

Consider the earlier example of business transactions relating to Mr. Oberoi. The elements that are affected by each transaction are marked in bold within the equation.
1. ## The business is proposed to be started.

Since the business has only been proposed and not yet started it has neither assets nor liabilities.

Capital+Liabilities=Assets
0 + 0 = 0

The equation is satisfied.

2. ## Started Business with a Capital of Rs. 1,00,000.

Since capital is being brought into the business in cash, the value of Capital has increased from zero to Rs. 1,00,000 and the value of cash has also increased from zero to Rs. 1,00,000.

Capital+Liabilities=Assets
Capital 1,00,000 + 0 = Cash (1,00,000)

The equation is satisfied.

3. ## Bought Furniture for cash Rs. 25,000.

Since Furniture is being bought by paying cash, the value of Furniture has increased from zero to Rs. 25,000 and the cash available with the business would reduce by Rs. 25,000 to Rs. 75,000..

Capital+Liabilities=Assets
1,00,000 + 0 = Cash (75,000) + Furniture (25,000)

The equation is satisfied.

4. ## Bought Goods for cash Rs. 25,000 from M/s Roxy Brothers.

Since goods are bought by paying cash, the value of Goods has increased from zero to Rs. 25,000 and the cash available with the business would reduce by Rs. 25,000 to Rs. 50,000.

Capital+Liabilities=Assets
1,00,000 + 0 = Cash (50,000) + Furniture (25,000) + Stock (25,000)

The equation is satisfied.

# • Vendor Name irrelevant in Cash Purchase

Though the goods have been purchased from M/s Roxy brothers, their name has no relevance while the transaction is being considered for accounting purposes, since the purchase is for cash.

When we make a cash purchase, the party from whom the purchase is made is irrelevant unless there is a time gap between the transaction of purchase and transaction of paying cash.

The vendor's name may also be considered if the organisation intends to have an accounting record of who purchases what and how much, in which case the purchase is recorded as a credit purchase and the due cleared immediately.

5. ## Bought Goods from Mr. Shyam Rao on credit for Rs. 10,000.

Since goods are bought on credit, the value of Goods has increased from Rs. 25,000 to Rs. 35,000. The liabilities of the business would increase from zero to Rs. 10,000. This liability is identified by the name of the vendor who gave the goods on credit i.e. Mr. Shyam Rao.

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (10,000) = Cash (50,000) + Furniture (25,000) + Stock (35,000)

The equation is satisfied.

6. ## Sold Goods for cash Rs. 20,000 to Mr. Peter.

Since goods are sold by taking cash, the value of Goods has decreased from Rs. 35,000 to Rs. 15,000. The cash available with the business would increase from Rs. 50,000 to Rs. 70,000.

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (10,000) = Cash (70,000) + Furniture (25,000) + Stock (15,000)

The equation is satisfied.

# • Buyer Name irrelevant in Cash Sale

Though the goods have been sold to Mr. Peter, his name has no relevance while the transaction is being considered for accounting purposes, since the sale is for cash.

When we make a cash sale, the party to whom the sale is made is irrelevant unless there is a time gap between the transaction of sale and transaction of receiving cash.

The buyer's name may also be considered if the organisation intends to have an accounting record of who bought what and how much, in which case the sale is recorded as a credit sale and the due cleared immediately.

7. ## Sold Goods on credit to M/s Bharat & Co., for Rs. 10,000.

Since goods are sold on credit, the value of Goods has decreased from Rs. 15,000 to Rs. 5,000. A new asset in the form of a debtor (those who owe us) is created. The new asset is identified by the name of the organisation which purchased the goods on credit i.e. M/s Bharat & Co.

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (10,000) = Cash (70,000) + Furniture (25,000) + Stock (5,000)
+ M/s Bharat & Co (10,000)

The equation is satisfied.

8. ## Paid Cash into Bank Rs. 60,000.

Since cash is paid into bank, the available cash reduces from Rs. 70,000 to Rs. 10,000. The amount paid into the bank is held by the bank on our behalf. The bank has to pay us the same whenever we ask for it. The bank therefore stands in the position of a debtor to us (those who owe us money).

The new asset is identified as "Bank" if there is only one bank account. Where there are more than one bank account, each bank is identified by its name.

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (10,000) = Cash (10,000) + Furniture (25,000) + Stock (5,000) + Bank (60,000)
+ M/s Bharat & Co (10,000)

The equation is satisfied.

9. ## Paid Cash to Mr. Shyam Rao, Rs. 5,000.

Since cash is paid to Mr. Shyam Rao, the available cash reduces from Rs. 10,000 to Rs. 5,000 and the liability in the name of Mr. Shyam Rao (the amount due to him) also reduces from Rs. 10,000 to Rs. 5,000.

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (5,000) = Cash (5,000) + Furniture (25,000) + Stock (5,000) + Bank (60,000)
+ M/s Bharat & Co (10,000)

The equation is satisfied.

10. ## Received cash from M/s Bharat & Co., on account, Rs. 8,000.

Since cash is received from M/s Bharat & Co., the available cash increases from Rs. 5,000 to Rs. 13,000 the asset in the name of M/s. Bharat & Co (the amount receivable from them) also reduces from Rs. 10,000 to Rs. 2,000.

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (5,000) = Cash (13,000) + Furniture (25,000) + Stock (5,000) + Bank (60,000)
+ M/s Bharat & Co (2,000)

The equation is satisfied.

# Dual Entity Concept

From the above analysis, you can notice that each transaction has its effect on two elements. This explains the dual entity concept which forms the foundation for the total concept of accounting.

# Dual Entity Concept

Every transaction relating to business has its effect on two distinct elements/accounts.

## » Dual

Consisting of or involving two parts or components usually in pairs

## » Duel

Any struggle between two skillful opponents (individuals or groups)

# • Double Entry System

The process of accounting that we are learning about is called the "Double Entry System of Accounting". This is so called based on the dual entity concept which states that every transaction relating to business has its effect on two elements. A better explanation can be given after learning what a LEDGER is.
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