ACCOUNTING FROM INCOMPLETE RECORDS (SINGLE ENTRY SYSTEM)

ACCOUNTING FROM INCOMPLETE RECORDS (SINGLE ENTRY SYSTEM)

‘Single Entry System’ may be defined as any system which is not exactly the double entry system. In other words, Single entry system may consist of:
(i)  Double entry in respect of certain transactions such as cash received from debtors, cash paid to creditors, etc.
(ii)  Single entry in respect of certain transactions such as cash purchases, cash sales, expenses made, fixed assets purchased, etc.
(iii)  No entry in respect of certain such as depreciation, bad debts,etc.
Thus, a business is said to be using single entry system if it is not following completely the principles of double entry system of bookkeeping. Kohler defines the single entry system as, ‘A system of book- keeping in which, as a rule, only records of cash and of personal accounts are maintained, it is always incomplete double entry, varying with the circumstances.’

SALIENT FEATURES

The salient features of the single entry system are as follows:

(i) Maintenance of personal accounts
Usually under this system personal accounts are maintained while real and nominal accounts are avoided. On account of this reason some accountants define it as a system where only personal accounts are maintained.

(ii) Maintenance of cash book
A cash book is maintained, which usually mixes up both the personal transactions and the business transactions.

(iii) Dependence on original vouchers
In order to collect the necessary information one has to depend on original vouchers. For example, the figure of credit purchases may not be readily available; it may have to be found out on the basis of the original invoices received from the suppliers. Similarly, the total figure of sales at the end of a particular period may have to be found out on the basis of the invoices which have been issued by the business from time to time.

(iv) No uniformity
The system may differ from firm to firm as per their individual requirements and conveniences.

(v) Suitability
The system is suitable in case of small proprietary or partnership concerns. Limited companies cannot adopt this system on account of legal requirements.

LIMITATIONS

The system suffers from the following limitations:

(i) Arithmetical accuracy cannot be checked
In case of double entry system of bookkeeping, Trial balance is prepared to check the arithmetical accuracy of the books of accounts. This is possible because every transaction is recorded at two places. In case of the single entry system, this is not done. Hence, trial balance cannot be prepared and the arithmetical accuracy of the books of accounts cannot be checked. This increases the possibility of more frauds and misappropriations, as compared to the double entry system of bookkeeping.

(ii) True profits cannot be known
In the absence of complete information for sales, purchases and other expenses, it is not possible to draw the profit and loss account. Hence, the true profit or loss, made or suffered by   the business, cannot be known.

(iii) Financial position of the business cannot be judged
In the absence of a true figure of profit and correct information about the assets and liabilities of the business, the balance sheet cannot be drawn up to give a correct picture of the financial position of the business on a particular date.

(iv)  Makes planning and decision-making difficult
The system does not provide accurate figures about the performance of the business and its financial position. For example, separate figures of gross profit, net profit and sales are not available. Thus, the ratio of gross profit to sales or net profit to sales cannot be found out. Similarly in the absence of any information about the cost of goods sold, the proportion of different elements of cost of sales cannot be found out. In the absence of such information, it becomes difficult for the proprietor of the business to know the reasons of his improving or deteriorating profitability and financial position. Thus, he is not in a position to compare, plan and take sound decision for the prosperity of the business. Moreover, it may be difficult for him to find the real value of his business in the event of his deciding to sell the business.

COMPUTATION OF PROFITS UNDER SINGLE ENTRY SYSTEM

The profit or loss in case of business maintaining accounts according to single entry system can be computed by two methods:
(i)  Net Worth method, and
(ii)  Conversion method.

Net Worth Method
According to this method, the profit or loss made by the business is computed by comparing the net worth (or capital) of the business on two different dates.

Following adjustments are required for determination of the profit in case of this method:

(i)  Adjustment for drawings: The proprietor may withdraw money from the business for his personal use. In the absence of any such withdrawal, the capital at the end of accounting period would have been more by the amount of money withdrawn by him. Thus, the amount of drawings should be added back to the capital at the end of the accounting period to find out his true profit for that period.
Adjustment for capital introduced: The proprietor may introduce further capital in the business during the course of the accounting year. This will increase the capital of the proprietor at the end of the accounting year. It is, therefore, necessary to reduce the amount of capital, by the amount of capital introduced by the proprietor during the year, in order to ascertain the profit earned by him during the course of the accounting year.


Conversion Method
The Net Worth method, explained above, does not provide a clear picture of the operational results of a business. It does not give information about sales, purchases, gross profit, operating expenses, etc. of the business. As a result, neither a meaningful analysis of the financial statements can be done nor can effective steps be taken to improve the financial position of the business. It will, therefore, be better to collect all such information from the books of accounts, and other sources, which is necessary for preparing a ‘Trial Balance’ of the business. This is done by preparing a total debtors account, a total creditor’s account, a bills receivable account and a bills payable account and receipts and payments accounts etc. on the basis of double entry. Accounts relating to different expenses, incomes, fixed assets and fixed liabilities, and outstanding, are also prepared with the help of receipts and payments accounts and additional information available. Thus, the closing balances of different accounts are found out and a trial balance prepared. Final accounts can then be prepared in the usual way. Such a method of collecting information as per the requirements of the double entry system of bookkeeping is termed as the ‘Conversion Method’.
In practice, usually, an abridged conversion method is followed. Under this method, nominal   accounts are not opened in the ledger, nor is a trial balance prepared. Only such information is collected which is required for preparing the trading and profit and loss account, and balance sheet of the business.


PREPARATION OF STATEMENT OF AFFAIRS UNDER SINGLE ENTRY SYSTEM
Statement of affairs is a statement giving the assets and liabilities of the business on a particular date. It is virtually the Balance Sheet of the business. However, the term Balance Sheet is used for the statement of assets and liabilities in the double entry system of bookkeeping where balances are taken from the ledger. In case of single entry system, all the assets and liabilities, which appear in the statement of affairs, are not necessarily taken from the ledger accounts, on account of incomplete recording of the transactions. Moreover, the term Balance Sheet is used for statement which shows the correct financial position of the business. In case of the single entry system, it may not be possible to prepare a statement which shows the correct financial position of the business, since the information from different sources, which may include not only the books of accounts, but other sources, which may not be hundred per cent reliable. For example, estimate about drawings may have to be made on the basis of the estimated living expenses of the proprietor of the business and also other estimated payments which might have been paid on his behalf.

Steps for preparing Statement of Affairs
The following steps may be taken for preparing the statement of affairs:

 (i)  In most cases in single entry system, a cash book is maintained. In case, this has been done, the cash and the bank balances can be taken from the cash book. In the absence of a proper cash book, cash balance may have to be found out by preparing a receipts and payments account on the basis of information, collected from the proprietor of the business, and the statement of accounts, which might have been received or sent by the proprietor from/to his debtors and creditors. Information regarding other business expenses can be collected from the salaries register of his employees, petty cash book, if any, maintained by him, etc. and the actual cash balance available with the business. The balance at the bank can be verified from the bank pass book or statement of account from the bank.

(ii)  A list of sundry debtors and creditors should be prepared. This may not be difficult because in most cases, a record of personal accounts is maintained under the single entry system.

(iii)  The value of the fixed assets like building, plant, furniture, etc. should be ascertained from vouchers or other documents available with the business. A reasonable charge for depreciation should also be made and the assets should be shown in the statement of affairs after charging depreciation.

(iv)  A physical verification of the stock should be taken and the value of the stock should be ascertained on the basis of the different invoices received from suppliers from time to time, in respect of the goods purchased.

(v)  The amount of outstanding expenses and the accrued income should also be determined. Last year’s figures about these items may be of considerable help in this respect.
(vi) The excess of assets over liabilities should be found out and this will denote the net worth or the capital of  the business on the date on which the Statement of Affairs has been prepared.