Commercial Applications
"Every transaction has four effects on accounting records." Give two reasons either for or against.
GAAP
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Answer
AGAINST — The statement is incorrect. Every transaction has only two effects on accounting records, not four.
Reasons:
Dual Aspect Principle — According to this principle, every transaction has a dual (two) effect — there must be a giver of benefit and an equal receiver of the same. Hence one account is debited and another account is credited with an equal amount.
Double Entry System — It is because of the dual effect that the accounting equation Assets = Liabilities + Capital always holds true and both sides of the Balance Sheet are always equal. The Double Entry System, which is the foundation of accounting, is built on the principle that every transaction has only two equal and opposite effects.
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