Dual Aspect Concept
This is the basic concept of book keeping. According to this concept every business transactions has a dual effect. For eg. Bought goods on Cash, here gains goods and loses Cash.. Goods and Cash are the two aspects of this transaction. Similarly when a new business established with certain amount as capital, the business gets cash and at the same time it creates an obligation to pay back the amount to the owner that he called Capital. During the course of business, the cash would be used to buy goods needed by the business. If the need for more cash, either the owner must bring additional funds or the business must borrow from others. Hence, the total value of the assets of a business on any date would be equal to the total claims against the business. The claims against the business are called equities. Equities are classified as Owner’s equities (Capital) and the Outsiders equities (Liabilities)
Accounting equation is given below.
Assets = Equities (Capital + Liabilities) & Capital = Assets – Liabilities.
Assets : Assets are things of value owned. It might be cash or other articles of value owned by the business. Anyting that can convert cash or other benefits to the business in future might be called as an asset. Cash in hand, Stock , Account receivable, Furniture, Machineries, Buildings etc.
Assets are classified into two. Fixed Assets (Assets acquired with the intension of using them in the business for a long period) and Current Assets (Cash or things can be converted into cash during the course of normal trade operation)
Liabilities : The claims of outsiders against the business are called liabilities. It is the amount payable to different persons and companies. Liabilities creates by purchase of assets and goods on credit or borrowings. Liabilities are classified into two. Long term and Short term. Long Term liabilities are loans received from individuals or financial institutions which are repayable after a long period. Short term liabilities are the amounts payable without much delay and this arise out of normal trade activities.
Capital or Owners Equity
The amount invested by the owner in the business is called capital. It the claim of the owner against the business. It is the difference between total assets and total liabilities.
Capital is classified into two Fixed and Working capital. The portion of capital used for purchasing fixed assets is known as fixed capital. Working capital refers to the part of capital kept for meeting daily needs of the business.
Drawings Account: Drawing means the withdrawals made by the proprietor from the business to meet his personal expenses.
Income and Expense: The revenues derived from the use of assets are called incomes. The amount spent for normal conduct of the trade activities are called expenses.