Single Entry System and Incomplete Records

What is Single entry system?

According to Carter Single Entry system is a method or a variety of methods, employed for the recording of transactions, which ignore the two-fold aspect and consequently fails to provide the businessman with the information necessary for him to be able to ascertain the position

Features

Usually, only Personal Accounts are prepared. Cash Book records both business and personal transactions. Too much dependence on Source documents to ascertain final status of the business. There is no standard procedure in maintaining records and vary from firm to firm. Usually found in a sole trader or a partnership firm.

Advantages

It is easy and simple method of recording business transactions. Less expensive as qualified staff is not required. Suitable for small businesses where cash transactions occur and very few assets and liabilities exists. Flexible method as there are no set procedures and principles followed.

Disadvantages

No double entry, thus Trial Balance cannot be prepared to check the arithmetical accuracy of books of accounts. Information related to assets and liabilities cannot be reliable because respective accounts have not been maintained. True Profit and Loss cannot be ascertained. Comparison of accounting performance with previous year or other firms not possible as any standard principle or procedure is not followed.

Finding Profit or Loss from Incomplete Records

Two methods to find out the Profit or loss from incomplete records

Statement of Affairs methods Conversion into Double entry method

Single Entry System and Incomplete Records

FIRST METHOD-Statement of Affairs method
In this method the capital of the business in the beginning of the period is compared with its capital at the end of the period. The difference represents profit or loss during the period.

If the closing capital is more than opening capital, it shows a profit for the business. If the closing capital is less than opening capital, the business had a loss. Opening balance of capital can be ascertained by preparing an Opening Statement of Affairs. Statement of Affairs is quite similar to a Balance Sheet (NOT exactly). Click here to download FORMAT-STATEMENT OF AFFAIRS (pdf) The difference between the assets and liabilities of the business is the OPENING CAPITAL of the business. Capital = Assets Liabilities Similarly, prepare a Closing Statement of Affairs to get the CLOSING CAPITAL of the business.

Adjustments in the Closing Capital

Drawings are added to the Closing Capital. Additional Capital is deducted from the Closing Capital Once the Closing Capital is calculated, the Opening Capital is deducted from it.

If Closing Capital is MORE than Opening Capital, it is a PROFIT. If Closing Capital is LESS than Opening Capital, it is a LOSS.

Net Formula
Profit = Closing Capital + Drawings Additional Capital Opening Capital

Some Adjustment
The profit achieved from this method is not the final net profit. Adjustments which result in increase in expenses or losses must be deducted from the Profit figure to get the accurate net profit. These are

Depreciation Outstanding expenses Interest on Capital Interest on Loans Provisions for Doubtful debts

Single Entry System and Incomplete Records

Adjustments which result in increase in incomes and gains must be added to the Profit figure. These are

Prepaid expenses Interest on investments At the end a final Statement of Affairs is prepared after these adjustments are done. Note: When the Opening Capital is more than the Closing Capital, it shows a LOSS. In this case, the adjustments which result in an increase in expense are added to the loss amount and the adjustments which result in increase income are deducted.

SECOND METHOD-Conversion into Double entry methods by finding missing information

Following steps have to be taken

Opening Capital is calculated by preparing an Opening Statement of Affairs. Cash Book is updated by adding all the missing information. Opening and closing cash balance has to be ascertained. Total Debtors Account has to be prepared. CLICK HERE TO DOWNLOAD FORMAT-TOTAL DEBTORS ACCOUNT (pdf) Total Creditors Account has to be prepared. CLICK HERE TO DOWNLOAD FORMAT-TOTAL CREDITORS ACCOUNT (pdf) Final Accounts are prepared i.e. Trading and Profit & Loss Account and Balance Sheet from the information collected in Steps 1 to 4.

Finding Missing information using Accounting Ratios If Gross Profit is expressed as a percentage of the cost price. In order words, Mark up is given. Mark up = Gross Profit/Cost price Example Calculate the Gross profit if the Sales = $54,000, Mark up is 20%. Goods costing $100 has been sold at $120. If sales are $54000 then the Gross Profit = 20/120 * 54,000= $9000

Single Entry System and Incomplete Records

If Gross Profit is expressed as a percentage of selling price i.e. Gross profit margin. Gross profit margin = Gross profit/ Selling price If Stock turnover ratio is stated Stock turnover is the rate at which the stock of goods is sold. Stock turnover= Cost of goods sold/ Average stock Example Cost of goods sold= $3000 Opening Stock= $400 Closing Stock = $600 AVERAGE STOCK $400+$600 = 2 = $500

Therefore, Stock turnover = $3000/$500 = 6 times per year or 2 months

D Exercises
I Statement of Affairs Method or Net Worth Method
Model: Calculation of Capital:
1. Calculate the Capital of Mr. Vasudev as on Mar 31, 2009 for the following information:

Answer: Rs 10,00,000

Model: Calculation of Profit/Loss:

2. Opening capital Rs 70,000; Capital introduced during the year Rs 15,000; Drawings Rs 5,000; Closing Capital Rs 1,00,000. Calculate Profit/Loss for the year. Answer: Profit Rs 20,000 3. Opening capital Rs 1,50,000; Additional Capital introduced Rs 30,000; Drawings Rs 10,000; Closing Capital Rs 1,60,000. Compute Profit/Loss for the year. Answer: Loss Rs 10,000 4. Calculate the missing figure:

Assets

Rs 93,000

Single Entry System and Incomplete Records

Liabilities Capital
5. Calculate the missing figure:

Rs 53,000 Rs ?