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Fundamentals of accounting
Fundamentals of accounting

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3.1.3 The duality principle in practice

Whether a business does one transaction or a thousand, the same results of the accounting equation and the duality principle are achieved.

  1. Each transaction will have two effects in order that the accounting equation is kept in balance.
  2. Assets or liabilities can further be broken down into the type of asset or liability that is affected.
  3. For each transaction, as well as for the overall effect of a number of transactions, the figure for capital will reflect the accounting equation: A = C + L.

The next activity should help you to understand how to apply the accounting equation and the duality principle over a number of different transactions.

Activity 3 The accounting equation in practice

Edgar Edwards sets up a small sole trader business as Edgar Edwards Enterprises on 1 July in the year 20X2.

Complete the table below, in which the first six transactions of the business are listed in the left-most column. The effect of the first three transactions, as well as the overall effect of all six transactions, has been completed for you to show you the accounting equation always balances.

Table 2 Completion of double-entry transactions

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Answer

Table 2 Completion of double-entry transactions
Transactions Effect on A = C + L
Assets =

£

Capital

£

+ Liabilities

£

1.   The owner starts the business with £5,000 paid into a business bank account on the 1 July 20X2.

+5,000

(bank)

+5,000 0
2.   The business buys furniture for £400 on credit from Pearl Ltd on the 2 July 20X2.

+400

(furniture)

0

+400

(payables: Pearl Ltd)

3.   The business buys a computer for £600 on the 3 July 20X2.

+600

(computer)

–600

(bank)

0 0
4.   The business borrows £5,000 on loan from a bank on the 4 July 20X2. The money is paid into the business bank account.

+5,000

(bank)

0

+5,000

(loan)

5.   The business pays Pearl Ltd £200 on the 5 July 20X2.

–200

(bank)

0

–200

(payables: Pearl Ltd)

6.   The owner takes £50 from the bank for personal spending on the 6 July 20X2.

–50

(bank)

–50 0
Summary (overall effect) +10,150 +4,950 +5,200

After these six transactions the accounting equation becomes:

Table 3 Summary totals in accounting equation form for Edgar Edwards Enterprises
Assets = Capital + Liabilities
£10,150 = £4,950 + £5,200

The accounting equation remains in balance as every transaction must alter both sides of the equation, A = C + L, by the same amount as a result of the duality principle.

This fact that every transaction has a dual effect on the accounting equation is the basis of the double-entry system of recording transactions.