Donalisa Johnson Kline
July 27, 2015
Instructor: Arnold Gilbo
“Dual aspect may be stated as “for every debit, there is a credit.” Each transaction should have double effect of the same amount” (Accounting for Management, 2014). This concept is known as the accounting equation. “The accounting equation states that at any point of time the assets of any entity must be equal to the total of equities” (Accounting for Management, 2014). This paper will discuss how the accounting equation relates to the components of the balance sheet and examples of how transactions affect the accounting equation.
How the Accounting Equation Relates to the Components of the Balance Sheet The balance sheet is a financial statement which reflects the accounting equation and the company’s financial position. Assets, liabilities, and owner’s/stockholders’ equity (at a specific time) are all reported the balance sheet. Like the balance sheet, the accounting equation displays that the business’ total assets are equal to the business’ total liabilities plus owner’s/stockholders’ equity. A transaction may equally impact two asset accounts while not impacting liabilities and equity. For example, when ABC Company spends cash to purchase equipment. The transaction, then reduces the amount in the cash account (special asset account) and increases the amount in the equipment account (asset account). Therefore, the net change is zero on the asset side. If the same transaction doesn’t impact anything on the liabilities and equity side, the accounting equation will remain balanced on the balance sheet.
Examples of How Transactions Affect the Accounting Equation