Dual Aspect Concept    

The foundation of Accounting is transactions and events. Modern Financial Accounting recognizes and records two aspects for every transaction and event. This is known as dual aspect or duality of a transaction. The system of maintenance of books based on duality is known as double entry system.

For example, when capital is invested in the business by the proprietor, in recognition of the concept of separate entity, the business treats the same as a liability. The result of such transaction is the increase in liability of the entity on one hand, and the increase in the cash of the business on other hand. Thus, the introduction of capital has a two-fold effect. Similarly, when loan is raised from outside sources, the two aspects of the event are the increase in the outside liability and the increase in the cash (assets) of the business.

In accounting terminology, the resources of the business are termed as 'assets', the obligations of the business to outsiders are termed as 'liabilities' and the obligation of the business towards the owners is termed as 'capital' or 'Equity'. The result of the duality concept, at any point of time, is that the sum of the assets of the business equals the sum of the liabilities and capital of the business.

Thus, the duality or accounting equivalence concept implies that:

Owners' Equity + Outside Liability = Assets

This equation is also known as the 'Fundamental Accounting equation'. We shall see that the entire mechanics of Financial Accounting revolves around this equation.