SINGLE ENTRY SYSTEM- ACCOUNTS FROM INCOMPLETE RECORDS

INTRODUCTION

Most business maintain a record of all transactions based on double entry book keeping
system. However a small simple business maintain only a single entry system that records the
bare essentials. In some cases the records of cash, amount receivable and accounts receivable
and taxes paid may be maintained. This type of accounting system with additional information
can typically been compiled into an income statement and statement of affairs by a professional
accountant.

MEANING

There is no system of accounts called 'Single entry system'. The term single is vaguely used
to refer to any method of maintaining accounts which does not confirm to strict principles of
double entry. It also doesn't mean that there is only one entry for each transaction. In fact single
entry system is combined with double entry for some transaction for example cash collected
from debtors and single entry for transactions like cash sales and no entry for transaction like
depreciation.

In case of pure single system only personal accounts are recorded. But in simple single
entry personal accounts and cash account are maintained. And in quasi single entry, personal
accounts, cash account and some subsidiary books are maintained. The single entry system does
not consist of nominal accounts and most of real accounts. Only small traders, medical
practitioners and other professionals follow this method.

DEFINITION

According to R.N. Carter Single entry system cannot be termed as a system as it is

not based on any scientific system, like double entry system. For this purpose single entry is
now-a-days known as preparation of accounts from incomplete records.
 According to Kohler Single entry system can be defined as "A system of book keeping in
which as a rule only records of cash and personal accounts are maintained. It is always
incomplete double entry, varying with circumstances".

CHARACTERISTICS OF SINGLE ENTRY SYSTEM

1) It is highly flexible according to the capabilities of individuals maintaining the records.

There is no uniformity in single entry system.

2) Personal accounts and cash books are maintained. Nominal accounts and most of real
accounts are omitted.

3) In case of single entry system both business dealings and personal transactions are
mixed while writing the cash book.

4) Sole traders partnership firms and professionals usually follow this method to write their
own accounts.

5) Regular final accounts cannot be prepared. profit or loss can be ascertained in a crude
way, which is not reliable.

ADVANTAGES OF SINGLE ENTRY SYSTEM

Single entry systems are generally used in the interest of simplicity. It is usually less
expensive than double entry system. The double entry system can be maintained only with the
help of the learned persons. The single entry system is generally very easy to maintain. A single
entry system is generally based on the income statement. It can be simple and practical if we
maintain a small business. The single entry system is readily understood by the people with little
or no financial or accounting background. A single entry system does not include of record
keeping does not include equal debits and credits to the balance sheet and income statement
accounts. A single entry system is not self balancing. A single entry system consist of
transactions posted in a notebook post book and journals.
DISADVANTAGES OF SINGLE ENTRY SYSTEM

1) Only personal accounts and cash account are maintained other personal accounts are left
out.

2) Trial balance cannot be prepared for the single entry system for any of the periods. so
the arithmetic accuracy of the single entry system cannot be verified

3) Data may not be available for management for the effective planning and controlling of
the business.

4) Lack of precise and systematic book keeping may lead to insufficient administration
and reduced control over the business.

5) It is difficult to assess the value of goodwill of the business in the absence of proper
records.

6) Commercial banks do not accept incomplete records as basis for incomplete records.

7) Tax authorities may charge tax arbitrarily in the absence of reliable records.

DIFFERENT BETWEEN SINGLE AND DOUBLE ENTRY SYSTEM

BASIS OF DIFFERENCE SINGLE ENTRY SYSTEM DOUBLE ENTRY SYSTEM

Recording of transactions
Opening of accounts
Preparation of trial balance
Revealing Financial position
Both aspects are recorded in
some cases single aspect or no
aspect s recorded.
Only personal and cash
accounts are opened.
Trial balance cannot be
prepared
Balance sheet cannot be
prepared so financial position
is difficult to ascertain
Both aspects of all
transactions are recorded.
All personal, real and nominal
accounts are opened
Trial balance can be prepared
Reliable financial position
can be found through balance
sheet
Utility It can be followed by small Suitable for any type of
business men who exercise business at any size.
personal control over the
business.

When the business records are incomplete, profit or loss can be found through any one of the
following two methods.

1) Net Worth Method (Statement of affairs method)

2) Conversion Method

NET WORTH METHOD

This statement is also called as statement of affairs. Net worth is the owner's share of
assets, after providing for outside liabilities . Different between net worth at the beginning of the
year at the end of the year represents the profit or loss for the year because owners worth of
share in assets increases or decreases due to profit or loss respectively. before ascertaining the
profit or loss adjustments must be made for any drawings by the owner or additional capital
contributed by him.

There are five steps which are to be followed for ascertaining profit or loss under net worth
method. Those steps are

1) Calculating opening capital

2) Ascertainments of drawings during the year

3) Ascertaining capital introduced during the year

4) Computing closing capital

5) Preparing statement of profit.

CALCULATING OPENING CAPITAL

Opening capital can be found by preparing a statement of affairs at the beginning of the
year. A statement of affairs is just like a balance sheet. Assets are shown on the right side and the
liabilities are shown on the left side of the statement of affairs.

ASCERTAINING OF DRAWINGS DURING THE YEAR

This is difficult task in most of the cases because cash book may show a part of
withdrawals only. Money may be used for personal purposes out of sale proceeds and the
balance only may be recorded in the cash book or deposited in the bank.

ASCERTAINING CAPITAL INTRODUCED DURING THE YEAR

Additional capital provided by the owner during the year may be in cash or in the form of
assets or goods. The total amount must be recorded, in whatever form it was bought in.

COMPUTING CLOSING CAPITAL

Closing capital can be found by preparing a statement of affairs at the end of the year, in
the same way as opening statement was prepared. However all adjustments relating to
depreciation provision for doubtful debts must be made in the closing statement of affairs which
are not necessary in the opening statement.

PREPARING STATEMENT OF PROFIT

The statement of profit can be prepared as follows

 STATEMENT OF PROFIT OR LOSS FOR THE YEAR

Closing Capital xxx

Add: Drawings xxx
xxx
Less: Additional xxx
Capital Introduced
Less: Opening Capital xxx xxx
Net profit/loss for the xxx
year

CONVERSION METHOD

` It is the process of collecting, comparing, computing and recording missing information

along with the available data in the incomplete books of a business is called 'Conversion
method'. Once the books are 'converted', all the future transactions can be recorded as per
'double entry system'.

NEED FOR CONVERSION: The net worth method does not provide a clear picture of the
operating results of a business. It does not show sales, purchases, gross profit, operating expenses
etc. So it is not possible to make a meaningful analysis of the financial statement and effective
steps to improve the financial position of the business.

The following are the steps to be followed for conversion of incomplete records as per the
requirement of double entry system.

STEP 1: Statement of affairs at the beginning of the year from which conversion is to be
effected should be prepared. The balance in the statement represents opening capital
STEP 2: Cash book with cash and bank columns or a single column should be prepared.
Careful scrutiny of bank pass book and enquiry and enquiry relating to cash takings used by the
owner for the personal expenses and payments are essential.

STEP 3: Bills receivable account, Bills payable account, total debtors account and total creditors
account must be prepared. Preparations of these accounts can help in finding any missing items
like opening or closing debtors, opening or closing creditors, credit purchases and sales etc.

STEP 4: The opening statement of affairs can now be completed, by filling up any missing
figure and opening capital can be ascertained.

STEP 5: Appropriate journal entry should be passed in respect of assets and liabilities included
in the opening statement of affairs .

STEP 6: Real and nominal accounts must be written from the information recorded in the cash
book total debtors account, total creditors account, etc. The double effect of every entry must be
posted to the ledger, opening new accounts wherever necessary.

STEP 7: All the accounts in the ledger must be balanced now and a trial balance should be
extracted.

STEP 8: From the trial balance and any other additional details, trading account, profit and loss
account and balance sheet must be prepared.

The following table shows the figures which are usually missing in problems and the
appropriate account from which they can be found.

MISSING ITEMS APPROPRIATE ACCOUNT TO FIND

THE ITEMS
Credit sales Total debtors account reveals any one of the
Opening debtors items as balancing figure.
Closing debtors
Cash collected from debtors
Credit purchases Total creditors account reveals any one of the
Opening creditors items as balancing figure.
Closing creditors
Cash paid to creditors
Opening stock Memorandum trading account reveal any one
Closing stock them, if gross profit ratio is known.
Opening bills receivable Bills receivable account can reveal any one of
Closing bills receivable the items as balancing figure.
Bills receivable received
Bills receivable collected
Opening bills payable Bills payable account can reveal any one of the
Closing bills payable items as balancing figure.
Bills payable issued
Bills payable honoured
Opening cash or bank Cash and bank account can reveal any one of
Closing cash or bank the missing items as balancing figure.
Cash sales
Cash purchases
Cash received from debtors
Cash paid to creditors
Drawings
Sundry expenses
Additional capital
Sundry income

ILLUSTRATION

Net Worth (or) Statement of affairs method

illustration 1

Find out the profits from the following data

 Rs
Capital at the beginning of the year 8,00,000
Drawings during the year 1,80,000
Capital at the end of the year 9,00,000
Capital introduced during the year 50,000

SOLUTION;

Statement of Profit

Rs

Closing capital 9,00,000

Add: Drawings 1,80,000

10,80,000
Less: Additional capital
50,000

10,30,000
Less: Opening Capital
8,00,000

Net Profit 2,30,000

ILLUSTRATION 2

Mohan, a retail merchant commenced business with a capital of Rs.12,000 on 1.1.94.

Subsequently on 1.5.94 he invested further capital of Rs. 5,000. During the year, he has
Withdrawn Rs. 2,000 for his personal use. On 31.12.94, his assets and liabilities are as follows:

Rs
Cash at bank 3,000
Debtors 4,000
Stock 16,000
Furniture 2,000
Creditors 5,000

Solution:

Calculation of closing capital

Statement of affairs of mohan as on 31.12.94

Liabilities Rs Assets Rs
Creditors 5,000 Cash at bank 3,000
Capital (bal.fig) 20,000 Debtors 4,000
Stock 16,000
Furniture 2,000
25,000 25,000
 Statement of profit (or) Loss for the year ended 31.12.94

Rs

Closing Capital 20,000

Add: Drawings 2,000

22,000

Less: Additional Capital 5,000

17,000

Less: Opening Capital 12,000

Profit 5,000