Introduction to Financial Accounting

1.
Write Short notes on any three of the following.
a. Dual Aspect Concept

Dual Aspect Concept, also known as Duality Principle, is a fundamental convention of accounting
that necessitates the recognition of all aspects of an accounting transaction. Dual aspect concept
is the underlying basis for double entry accounting system.

Double entry accounting system is based on the duality principle and was devised to account for
all aspects of a transaction. Under the system, aspects of transactions are classified under two
main types:
1) Debit
2) Credit
Debit is the portion of transaction that accounts for the increase in assets and expenses, and the
decrease in liabilities, equity and income.
Credit is the portion of transaction that accounts for the increase in income, liabilities and equity,
and the decrease in assets and expenses.
The classification of debit and credit effects is structured in such a way that for each debit there
is a corresponding credit and vice versa. Hence, every transaction will have 'dual' effects (i.e.
debit effects and credit effects).
The application of duality principle therefore ensures that all aspects of a transaction are
accounted for in the financial statements.
According to this concept, every transaction of a business has two aspects i.e. debit and credit of
equal amount. In other words, for every debit there is an equal credit and vice-a-versa. For
example, Mr. X bought goods for cash for his business. This transaction has two effects, one the
goods (stock) is increasing which is debit and second the cash is reducing which is credit. Thus
CAPITAL (EQUITY) = CASH (ASSETS)

c. Accrued Income and Outstanding expenses

Accrued Incomes refers to those incomes which have become due but not yet received. For
example, interest declared by bank is although due but is received after a period of time.

Outstanding Expenses: As against the accrued incomes, outstanding expenses are those expenses
which have become due for payment but not yet paid off. For example, the electricity bill or the
telephone bill which become due at the end of a period say a month but they are usually paid
Introduction to Financial Accounting

after the due date. Another example is salary, i.e. an employee works for 30 days a month and
hence his salary for that month becomes due on last day of the month but the same is paid by
the employer on some date of the next month.

d. Convention of Conservatism

This principle says Do not anticipate any future profits but provide for all possible losses. The
application of this convention ensures the true and fair picture of the financial statements and
what it actually is and not what it ought to be. Thus this convention must be used very cautiously
so that the true and fair picture of financial statement is not affected. For example, closing stock
is shown at cost or market price whichever is lower. Similarly, adequate provisions must be made
as for provisions for doubtful debts, reserves, etc.