Page 47 - F3 -FA Integrated Workbook STUDENT 2018-19

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. This is often referred to as ‘the dual effect’.

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.

The accounting equation can be expressed as follows:

Assets = Equity + Liabilities, or

Assets – Liabilities = Equity

The accounting equation is a simple expression of the fact that at any point in time
the assets of the business entity will be equal to its liabilities plus equity.

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