Dual Effect Principle
In this section we are going to look at the way in which every single business transaction has two sides. In terms of accounting many people will think of the phrase ‘balance the books’. This comes from dual effect principle.
The dual effect principle is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the records of a business. This concept states that every transaction has a dual or double effect and should therefore be recorded in two places. This is the beginning of the double entry book keeping system
The basis of this principle is that everything that every business does has two effects.
If we take a basic transaction, David buys a van for £5000, we can break this down to see that there is two affects.
Effect 1 – David has £5,000 less in his bank
Effect 2 – David has an asset that cost £5,000
All transactions, no matter what the business or the transaction, have this dual effect. Both sides of the transaction are recorded independently. If, by accident, one of the effects is recorded at the wrong value then the records will not ‘balance’.
If we owed someone £500 and then paid them the effects would be:-
Effect 1 – We would have £500 less in the bank
Effect 2 – We no longer owe them £500
Understanding the dual effect principle and being able to identify the two effects of a transaction is the first step to being able to record that transaction in the accounting records of the business.