Explain the two fundamental equalities of double-entry accounting system.
Explanation of Solution
Double-entry accounting system:
Double-entry system refers to the double effect of each financial transaction that occurs. One is debit effect and the other is credit effect. In each and every transaction at least two accounts for the two aspects must be affected. In short, for each and every debit there must be equal corresponding credit.
Explain the two fundamental equalities of double-entry accounting system as follows:
The two fundamental equalities of the double-entry accounting system are,
- Assets must equal to claims of the business (
accounting equation ) - Debits must equal to credits
Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Total of assets must equal to the claims (liabilities and
In each and every transaction at least two accounts for the two aspects (debit and credit) must be affected. In short, for each and every debit there must be equal corresponding credit.
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