Single entry system - class-XII

Book keeping is an unsystematic method of recording transactions.It is observed, that many businessmen keep incomplete records because of the following reasons : 

Preparation of the profit and loss account cannot be prepared through the information assembled through the single entry system. This means that this system cannot help the organization to determine its financial position because there is no provision to make adjustments.

On the other hand, the double entry system of recording financial transactions of the organization is useful in the preparation of trading profit and loss accounts as adjustments are made at the time of preparing final accounts.

The definition provided is the standard one attributed to Kohler regarding the Single Entry System of bookkeeping.

In single entry system, incomplete records are maintained while in double entry system complete recording of transactions is there. In single entry system comparison between two accounting periods is very difficult.

The dual aspect concept states that every business transaction requires recordation in two different accounts. This concept is the basis of double entry accounting, which is required by all accounting frameworks in order to produce reliable financial statements.

A single entry book-keeping system or single-entry accounting system is a method of bookkeeping relying on a one sided accounting entry to maintain financial information.

In single entry system following things are prepared:

1. Cash book - to record all cash transaction

2. Customer's book - to record balances of debtors

3. Day Books - in which all day to day transactions or activities are recorded

4. Statement of profit and loss to arrive at profit or loss.

5. Statement of affairs to arrive at closing capital at the year end.

As Profit or loss under single entry system is ascertained by the difference between Closing and Opening Capitals it make convenient for small traders to follow single entry system due to following features:
a) Hassle free
b) no need for maintaining books of accounts
c) special knowledge of double entry system is not required.

Suppose Opening Capital (i.e capital on the 1st day of financial year) is Rs. 50,000 and Closing Capital ( i.e capital on the last day of financial year ) is Rs. 70,000. the resulting difference is more by Rs. 20000 indicating a positive increment in capital called Profit.

Normally Single entry system is maintained by small traders as it do not require special set of book-keeping and expert accounting knowledge. Hence, it becomes hassle free for traders to ascertain their profit of loss earned by the business through single entry system.

A system were Profit or loss earned by the business  is based
on the difference between its Opening and closing capital. is called Single entry system
In order to find the  capitals , Statement of affairs are prepared which are based on an equation Capital = Assets - Liabilities
Hence, basic accounting aspects of debit and credit are not followed.

Under Single entry System only personal accounts and cash A/c are opened. 

Under single entry system Books of accounts are not maintained hence, Trial Balance is not Possible to Prepare.

Profit or loss earned by the business under single entry system is based
on the difference between its Opening and closing capital.
To ascertain this capital Statement of affairs are prepared.

Single Entry System of Accounting, also known as Accounting from Incomplete Records, is a non-standard and non-scientific system of accounting. This system is adopted by small businessmen as they do not have enough capital and expertise to employ the standard double entry system of accounting in their business.

Sole proprietorship is type of enterprise that is owned and run by one natural person and in which there is no legal distinction between the owner and business entity. The owner is in direct control of all elements and is legally accountable for the finances of such business and this may include debt, loans, loss, etc.

For a Sole Proprietor, income tax is not an expense incurred to generate revenue hence it is not treated as an expense to be paid out of profits. In this case, income tax is treated as a personal expense resulting in drawings from the business concluding to a reduction of capital.

To ascertain the profit, closing capital is to be adjusted by deducting opening capital and adding drawings.

When there is no double entry system of accounting is followed, the profits are calculated on the basis of comparing the opening and closing of capital/assets by giving the effect of drawings.

        Closing Capital                         1,80,000

Allowing interest on capital is an indirect expense for the business, an increase in expenses will lower the profit for the year. Hence, Interest on capital is deducted.

Additional capital during the year is a result of working capital requirements and closing capital is the composition of profit or loss along with some capital contribution.
Hence, to remove the capital effect additional capital is deducted from closing capital in order to derive the correct profit or loss earned by the company.

The Statement of Affairs Method: takes the difference of opening and closing capitals for calculation of profit or loss under Single Entry System
The Conversion Method of single entry system: tries to convert the records from single entry to double entry system to find the Profit or loss earned by the business.

An increment of closing capital is a result of excess revenue earned during the year against the opening capital at the beginning thus representing Profit.

As Drawing refers to withdrawal of capital, Due to drawings, closing capital is decreased resulting a reduced Profit.
Hence, to ascertain correct profit Drawings are added back to closing capital.

Calculation of total assets at the end of the year :- 

Normal loss is inherent to the nature of the commodity (e.g., evaporation, breakage). Abnormal loss is not inherent.

Profit is calculated by the taking into account the fluctuations of the capital at the beginning and at the end of the year, by adding the drawings, and deducting the capital introduced to the capital at the end of the year.  

In a single entry system, only personal accounts and cash books are typically maintained. Nominal accounts (expenses, incomes) are not recorded, making it impossible to calculate profit or loss through a traditional Trading and Profit and Loss account.

Under the single entry system, profit is calculated using the equation: Closing Capital + Drawings - Capital Introduced - Opening Capital = Profit.

Since a full set of accounts is not maintained in a single entry system, profit is typically ascertained by comparing the capital at the beginning and end of the period, often using a Statement of Affairs.

To ascertain the Capital, Statements of affairs are prepared.
Capital = Assets - Liabilities
The above equation under which statement of affairs are prepared reflects the financial position of the business.

Statement of Affairs is Based under Accounting Equation " Assets = Capital + Liabilities"
thus to ascertain the Closing Capital at the end of the year  Closing Liabilities are deducted from closing assets.

As assets represents the total funds applied in the business from capital (owners fund) and liabilities(external funds e.g bank loan, creditors etc).
therefore the difference between Assets and Liabilities will represent Capital.

Calculation of total assets at the end of the year :- 

Sometimes a shareholder pays a portion or whole on the unpaid amount on the shares held by him in advance. In such a case, money so received in advance is transferred to Calls-in- advance account. It is important to note that calls-in-advance does not form part of share capital. In-spite of this, according to Section 93 dividend may be paid on calls in advance, if authorized by the Articles.

Disclosure in Balance Sheet:

Calls in advance is shown separately, in the Balance Sheet as liability of the company under the heading ‘Current Liabilities’ until the calls are made and the amount actually becomes payable by the shareholder.

Interest on Calls-in-advance:

Since the amount received as calls-in-advance is a liability of the company, it is liable to pay interest on the calls-in-advance from the date of receipt of the amount till the date when the call becomes due for payment. If the Articles of the Company are silent about the rate of interest on calls-in-advance, then rate of interest is 6% p.a. Such an interest is a charge on profits and has to be paid to the concerned shareholder even if there is no profit.

The accounting treatemt for interest on calls in advance is as follows:

1. For interest due

 Interest on calls in advance A/c     Dr.

                To sundry shareholder's  A/c

2. For interest paid

 Sundry shareholder A/c                  Dr.

                To Bank A/c

3. For transfer of balance of interest to profit and loss A/c

  Profit and Loss A/c                            Dr.

                  To Interest on calls in advance A/c

Calculation of total assets at the end of the year :-