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