Single Entry System

It is also called as incomplete double entry system. It is a system of book keeping

which maintain only records of cash and personal accounts. In other words it 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.
Difference between Double Entry System and Single Entry System
Basis of Difference
Recording of both aspects

Double Entry System

It records the both aspects
of every transactions

Types of accounts

All accounts personal,

real and nominal are
maintained under it.
Arithmetical accuracy of
the books of account can
be checked in it by
preparing a trial balance
True profit or loss can be
ascertained
in
it
by
preparing
Trading
and
Profit & Loss account.

Trial Balance

Net profit or loss

Financial Position

True financial position is

ascertained by preparing
Balance Sheet

Adjustments

Under
this
system,
adjustments are made
while
preparing
final
accounts

Proof

Books maintained under

this system are accepted

Single Entry System

Under this system both
the
aspects
of
very
transactions are recorded.
For
some
other
transactions one aspect
and yet for others no
aspect at all is recorded
Only personal accounts
and a cash book are
maintained under it.
Arithmetical
accuracy
cannot be checked in it
because a trial balance
cannot be prepared.
True Profit or loss cannot
be
ascertained
in
it
because a Trading and
Profit & Loss account
cannot be prepared.
True
financial
position
cannot be ascertained
because
the
Balance
sheet cannot be prepared.
Only a statement of affairs
is prepared based on
incomplete accounts and
estimates
No adjustments are made
under
this
system
because
of
incompleteness
of
accounts
Books maintained under
this
system
are
not

Suitability

as evidence in the court of

law
This method is suitable for
all types of business,
whether small or large

accepted as evidence in
the court of law
This method is suitable
only
for
small
size
business
where
the
number of transactions is
less and that too mostly of
cash nature.

Advantages
1. Simple Method: it is an easy and simple method of recording business
transactions because it does not require any special knowledge of the
principles of double entry system.
2. Less expensive: only the cash book and some of the ledger accounts are
maintained under this system. As such, the staff required for maintaining the
accounts is also less in comparison to double entry system.
3. Suitable for small concerns: this method is suitable to small business
concerns such as sole trader or partnership firm which have mostly cash
transactions and very few assets and liabilities. Limited companies cannot
keep their books on this system because of legal provision.
4. Easy to calculate profit or loss: it is easier to calculate profit or loss under this
method. For this purpose, only the closing capital has to be compared with
the opening capital along with some adjustments.
5. Flexible Method: the system is more practical and rejects the strict rules of
double entry system. It can be easily changed and adjusted according to the
needs of a particular business.
Disadvantages
1. Preparation of Trial balance not possible: this method does not record both
the aspects of a transaction. As such trial balance cannot be prepared to
check the arithmetical accuracy of the books of account. This increases the
possibility of frauds and misappropriations.
2. Incomplete and unscientific system: this system is incomplete and
unscientific due to the fact that both the aspects, debit and credit of a
transaction are not recorded, no set of rules are followed under this method.
3. True profit or loss cannot be ascertained: because nominal accounts are not
maintained, a Trading and Profit & Loss account cannot be prepared and
hence the profit earned or loss suffered during a particular period cannot be
determined with accuracy.
4. Difficulty in preparing balance sheet: since real accounts are not maintained
so Balance sheet cannot be prepared to depict the true financial position of
the business. Only a statement of affairs is prepared wherein the value of
assets and liabilities is written on estimated basis.

5. No control on assets: since real accounts are not maintained, it is not possible
to keep full control on the assets and as such the chances of misappropriation
of assets cannot be avoided.
6. No recognition in the assessment of Income Tax and Sales Tax: the system
fails to reveal the true profit and sales of a business. As such the accounts
maintained under this system are not accepted by tax authorities.
7. Proper valuation of assets not possible at the time of sale of business: it
becomes very difficult to fix the correct price of assets, specially goodwill, at
the time of sale of the business.
Ascertainment of Profit or Loss from Incomplete Records
Despite the records being incomplete, the businessman would like to know the
trading results as also the financial position of the business at the end of a
particular period. This is done by adopting one of the two methods mentioned
below:
1. Statement of Affairs Method or Capital Comparison Method or Net Worth
Method
2. Conversion into Double Entry Method
1. Statement of Affairs Method: according to this method, the profits are
ascertained by comparing the capital at the end and capital at the beginning
of the accounting period. If the capital at the end of an accounting period is
more than that at the beginning (with necessary adjustments), the difference
is treated as profit. If, on the other hand, the capital at the end is less than
that of beginning, the difference is treated as loss.
As such, in order to ascertain profit according to this method, it is necessary to
calculate the capital at the beginning of the year and also at the end of the year.
Capital at the beginning is calculated by preparing an Opening Statement of
Affairs and similarly capital at the end is calculated by preparing a Closing
Statement of Affairs. A statement of affairs is similar to, though not the same, as
Balance Sheet and prepared as follows:

Liabilities
Bank Overdraft
Bills payable
Sundry Creditors
Outstanding expenses
Incomes
Received
in
advance
Capital (being, balancing
figure)

Statement of Affairs
as on..
Amount
Assets
Rs
Cash in hand
Cash at bank
Bills Receivable
Sundry debtors
Stock
Prepaid Expenses
Accrued Income
Furniture

Amount

Plant & Machinery etc

..

If total of liabilities is deducted from the total of assets side of the statement of
affairs, the balance will be taken as capital. It is based on the accounting equation:
Capital = Assets-Liabilities
Although the assets and liabilities are recorded in a statement of affairs just like a
balance sheet, it should not be described as a balance sheet because of the
following differences:
Basis of Difference
Double entry

Arithmetical
Accuracy

Value of Assets and

Liabilities

Objective

Omission
of
an
Asset or a Liability

Balance Sheet
It is prepared with list of
ledger balances drawn for
the books of account kept
on the basis of double
entry.
The tallying of balance
sheet proves arithmetical
accuracy of accounting
books
because
it
is
prepared on the basis of
trial balance
The value of assets and
liabilities shown in the
balance sheet are the
actual values based on
ledger accounts
It
is
prepared
for
ascertaining the financial
position of business
If an asset or liability is
omitted while preparing a
Balance Sheet, it will be
easily detected because
the balance sheet will not
tally.

Statement of Affairs
It is not prepared with the list of
ledger balances but with such
information as is available from
the accounting records kept on
the basis of single entry
A Statement of Affairs does not
prove the arithmetical accuracy
of accounting books because it is
not prepared on the basis of trial
balance.
The value of assets and liabilities
shown in the Statement of Affairs
are merely the estimates based
on physical inspection.
It is prepared for ascertaining the
capital of a business.
If an asset or liability is omitted
while preparing the statement of
affairs, it cannot be easily
detected

Calculation of Profit: the steps for calculating the profit made during the
year can be stated as under:
1. Prepare the statement of affairs at the beginning for calculating the capital at
the start of the year (Known as opening capital)

2. Prepare the statement of affairs at the end for calculating the capital at the
end of the year (Known as closing capital)
3. Adjust the closing capital by adding into it the drawings made by the
proprietor during the year and deductions there from the additional capital
introduced during the year.
Drawings are also added to the closing capital on the logic that if the
drawings had not been made, closing capital would have been higher by this
amount. Similarly additional capital is deducted from the closing capital on
the logic that if the additional capital had not been introduced, closing capital
would have been lower by this amount.
4. Now the opening capital is deducted from the adjusted closing capital to
ascertain the profit or loss. . If the capital at the end of an accounting period
is more than that at the beginning (with necessary adjustments), the
difference is treated as profit. If, on the other hand, the capital at the end is
less than that of beginning, the difference is treated as loss.
The entire process discussed as above may be put in the form of a Formula a
follows:
Profit= Closing capital + Drawings- Additional Capital-Opening Capital

Adjustments: Profit or loss arrived at by comparing the opening and closing capitals
is not actually the net profit. In order to calculate the amount of net profit or loss
certain adjustments are required to be made.
When some adjustments are given in the question, the opening as well as closing
statement of affairs should first to be prepared without taking into account these
adjustments.
After this, the adjustments which result in increase in expenses or losses must be
deducted to arrive at the figure of net profit. Examples of such adjustments are
Depreciation, Outstanding Expenses, Interest on Capital, Interest on Loans, and
Provision for Doubtful Debts.
The adjustments which result in increase in incomes and gains must be added to
arrive at the figure of net profit. Examples of such adjustments are prepaid
expenses, interest on investments etc.
Last of all, the statement of affairs should be prepared once again after
incorporating the adjustment therein. In this way, the adjustments are recorded at
two places.

In case of Loss: when the amount of closing capital (after adjusting drawings and
additional capital)is less than that of opening capital, the difference is treated as
loss of the business.

In case of loss the adjustments which result in increase in expenses must be added
to the amount of loss and on the other hand the adjustments which result in
increase in incomes must be deducted.