Page 47 - Microsoft Word - 00 - Prelims.docx

Ledger accounting and double-entry bookkeeping

4.2 Duality, double-entry and the accounting equation

Each transaction that an entity enters into affects the financial statements in two
ways.

For example, if a business entity purchased a vehicle for cash. The two effects on the
business would be:

(1) it has increased the vehicle assets it has at its disposal; for generating income,
and

(2) It has reduced the cash available to the business.

To follow the rules of double-entry bookkeeping, each time a transaction is recorded,
both effects must be taken into account. These two effects are equal and opposite
and, as such, the accounting equation will always be balanced.

41