This concept is the core of accounting. According to this concept, every business transaction has a dual aspect. This concept is explained in detail below:
The properties owned by a business enterprise are referred to as assets and the rights or claims to the various parties against the assets are referred to as equities. The relationship between the two may be expressed in the form of an equation as follows:
Equities = Assets
Equities may be subdivided into two principal types: the rights of creditors and the rights of owners. The rights of creditors represent debts of the business and are called liabilities. The rights of the owners are called capital.
Expansion of the equation to give recognition to the two types of equities results in the following which is known as the accounting equation:
Liabilities + Capital = Assets
It is customary to place ‘liabilities’ before ‘capital’ because creditors have priority in the repayment of their claims as compared to that of owners. Sometimes greater emphasis is given to the residual claim of the owners by transferring liabilities to the other side of the equation as:
Capital = Assets – Liabilities
All business transactions, however simple or complex they are, result in a change in the three basic elements of the equation.