Single Entry System Notes | Accounting from Incomplete Records Notes [For BCOM FYUGP New Syllabus 2024]

Single Entry System Meaning

It is difficult to define single entry system because, in fact, there exists no system like single entry system. Broadly speaking, it is a defective double entry system. Any system that falls short of complete double entry method is called single entry system. Under this method, sometimes both the aspects of transactions are recorded, sometimes only one aspect is recorded or sometime no aspects of transactions is recorded in the books. 

As a general rule under the single entry practice only the personal aspects of the transactions are recorded and the nominal and real aspects are omitted altogether. As the name implies, the single entry system does not take into account the double affect of every transaction. The ledger contains only the personal accounts of debtors and creditors, all impersonal accounts such as purchases, sales, wages, carriage, rent etc., are not recorded. 

Thus the system does not consider the two fold aspect of every transaction. In short single entry system may be called a mix of double entry, single entry and no entry.

Single entry system may be defined as a system which does not strictly conform to the double entry system of bookkeeping. Under this system what is found in practice is an intermixture of single entry, double entry and no entry.

Also Read: MCQ on Single Entry System

Define Single Entry System

According to Arthur Field house, "single entry is faulty, incomplete, inaccurate, unscientific and unsystematic style of account keeping". For this reason many persons call the single entry system as accounting from incomplete records.

In simple words, it is defined as the method of accounting which does not follow the principle of double entry system .Under this method only one account is given debit or credit for each transaction. 

Characteristics / Features of Single Entry System

From the above explanation, we get the following characteristics of single entry system:

1. Maintenance of personal accounts: In this system, generally personal Account are kept but real and Normal Account are ignored. In some cases, cash book and other subsidiary books are also prepared.

2. Suitability: This system is suitable for small business, sole trade business or partnership businesses.

3. No preparation of trial balance: In the absence of record of the two-fold aspect of every transaction, it is not possible to prepare a trial balance and check the arithmetical accuracy of the books of account.

4. No uniformity: The account from incomplete records is a mixture of single entry, double entry and no entry. Recording is done according to the convenience and information needs of the users of accounts.

5. Determination of profit: Under this system the profit or loss can be found out but its composition will not be available.

Types of Single Entry System

The single Entry System can be classified into following three categories:-

a)      Pure Single Entry System: Under this type of Single entry, the dual aspect of each transaction is ignored. Only personal account of debtors and creditors are kept but no record is kept for Real or Nominal Account.

b)      Simple Single Entry System: Under this system, (i) Personal Account and (ii) Cash book are kept. Posting from cash book is made only to the personal accounts and not to the real or nominal accounts.

c)       Quasi Single Entry System: Under this System, (i) Personal Account, (ii) Cash book and (iii) Some other subsidiary books like purchase books, sales book, bills receivable book and bills payable book are kept.

Uses and Importance of Single Entry System

Single entry system is very advantageous for small business organisations due to the following reasons:

1. Suitability: This system is very much suitable for small organisations because expert knowledge is not necessary to maintain accounts under single entry system.

2. Inexpensive: This system is less costly because there is no need to appoint an accountant to maintain accounts. Transactions in a small organisation are very few which can be recorded by proprietor itself.

3. Simplicity: Due to simplicity and lack of rigidity any one can maintain it without any adequate knowledge of accounting.

4. Limited accounting work: Since only personal accounts and cash book are maintain, the number of accounts to be opened under single entry system is very less which reduces accounting work.

5. Accounting for an event: In the case of accounting for an event i.e., social function, academic event, festival etc., single entry system can be followed.

Limitations of Single Entry System

The following are the notable disadvantages of single entry system:

1. Unscientific and Unsystematic: The single entry system is unsystematic and unscientific system of recording financial transactions. It does not have any set of fixed rules and principles for recording and reporting the financial transactions.

2. Incomplete System: Single entry system is incomplete system because it does not record the two aspects or accounts of all the financial transactions of the business. It does not maintain any record of the transactions relating to the nominal account and real account except cash account.

3. Lack of Arithmetical Accuracy: Single entry system is not based on the principles of debit and credit. It fails to provide the arithmetical accuracy of the books of accounts. Trial balance cannot be prepared under this system to check the arithmetical accuracy of books of accounts.

4. Does Not Reflect True Profit Or Loss: Under single entry system, the true amount of profit or loss cannot be ascertained because it does not maintain the nominal accounts.

5. Does Not Reflect True Financial Position: The single entry system does not maintain real accounts except cash book. Therefore, it cannot reveal the true financial position of the business.

6. Frauds and Errors: The single entry system of book-keeping is incomplete, inaccurate and unscientific. It does not help to check the arithmetical accuracy of the books of accounts. Therefore, there is always a possibility of committing frauds and errors in the books of accounts.

7. Unacceptable for Tax Purpose: The single entry of book keeping has incomplete records of the financial transactions of the business. Hence, the tax office cannot accept the account maintained under this system for the purpose of assessment of tax.

Meaning of Statement of Affairs

In case of Single entry System, it not possible to prepare the Balance sheet of the business because real and nominal accounts are not maintained. Therefore, to judge the financial position of the business a statement showing various assets and liabilities on a particular date is prepared from such information as may be available. Such statement is known as Statement of affairs.  A statement of affairs is prepared by estimating the values of assets and liabilities (except cash and personal accounts) in the absence of real and nominal accounts in the single entry system.

Preparation of single entry system:

The following points should be considered while preparing Statement of Affairs:

a)      The cash book should be balanced and cash in hand should be verified with the balance.

b)      Bank reconciliation statement should be prepared to reconcile cash book and pass book balance.

c)       The list of debtors and creditors should be prepared from personal accounts maintained in the ledger.

d)      Stock-in-trade should be taken and valued at cost or market price, whichever is lower.

e)      The value of fixed assets should be ascertained from vouchers or other available sources after providing depreciation.                                                                                                                                                    

f)       All outstanding expenses and incomes should be considered and shown in the Statement of affairs.

g)      Similarly, all expenses paid in advance and incomes received in advance should be considered and shown in the Statement of affairs.

h)      Other specific assets and liabilities, such bills receivable, bills payable, loan from bank or other sources etc. should also be taken into consideration.

i)        The excess of assets over liabilities should be taken as capital of the proprietor on the date when the statement of affairs is prepared.

Objectives of Statement of affairs:

a)      To depict the financial position of the business on a particular date showing various assets and liabilities.

b)      To assist in ascertainment of trading profit or loss for a particular period.

Calculation of profit under single entry system

In case of accounting from incomplete records, the following two methods are used to determine profit for the year:

a)      Statement of Affairs Method or Net Worth Method

b)      Conversion Method              

a). Statement of Affairs or Net Worth Method: When books of accounts are maintained under single entry system, it is not possible to prepare trading and profit and loss account because no record is maintained for nominal accounts. However in order to determine profit or loss, Statement of affairs method based on fundamental balance sheet equation is followed. Under this method, two balance sheets (Statement of affairs) are prepared. One at the beginning of the period for finding out the opening capital and the other at the end of the period for finding out the closing capital. But necessary adjustments is required to be made for Drawings made by the proprietor, additional capital introduced during the year, interest on drawings and on capital for ascertaining the true operating profit.

Steps for ascertaining Profit under Statement of affairs Method:    

a) A Statement of Affairs at the beginning of the year is prepared to determine the amount of capital of the proprietor at the beginning of the year.

b) Similarly, A Statement of Affairs at the end of the year is prepared to determine the amount of capital at the end of the year.

c) Drawings made by the proprietor during the year should be added to the amount of Capital at the end of the year for the reason that the capital at the end would have been more if there is no such withdrawal by the proprietor.

Similarly, Capital introduced during the year should be deducted from the Capital at the end of the year for the reason that the capital at the end would have been less if there is no such addition by the proprietor.

d) Capital at the beginning of the year should be deducted from the closing capital as adjusted in step (c) and (d) above and the difference will be either a trading profit or loss. If the adjusted capital exceeds the opening capital, the excess will be profit for the year. But if the adjusted capital is less than the capital at the beginning of the year, the difference will be loss for the year.

e) Interest on capital and interest on drawings (if any) are to be adjusted in profit or loss as derived in step (e) to arrive at the net profit or loss for the year.

b). Conversion from Single Entry System to Double Entry System:

The following Steps should be followed if it is desired to change the system of accounting from Single entry to double entry:

A statement of affairs should be prepared at the beginning of the accounting period to determine the opening capital of the business.

The Cash Book should be gone through and entries relating to impersonal accounts should be posted to their respective accounts as impersonal accounts are not maintained under single entry system. This would complete the double entry of the cash book. If no cash account is maintained, pass book should be carefully examined and all cash transactions relating to business to be identified and with the help of it cash book should be prepared.

If a Petty cash book is maintained, the monthly analysis should be posted to the debit of the various accounts for expenses and the total credited to Petty cash account.

Prepare Total Debtors account, Total Creditors account, Bills receivable and Bills payable account, Total Sales and Total Purchases account. This helps in finding out different missing figure relating to these accounts.

Now, the personal accounts and Cash book, which have already been kept under single entry system, should be scrutinized in order to find out the nominal items. Such items should be posted to their respective impersonal accounts so that the two-fold effect of such transactions should be completed.

After completing the double entry of all the transactions, a Trial balance should be prepared to test the arithmetical accuracy of the books.

From the Trial balance, Trading and Profit and Loss account and Balance sheet can be prepared after taking into consideration the necessary adjustments like outstanding expenses and incomes, depreciation, provision for bad debts and discounts etc.

Distinguish between

                (a) Single Entry and Double Entry System.

                (b) Statement of affairs and Balance Sheet

Difference between Double Entry System and Single Entry System

Double Entry System	Single Entry System
Under this system, both aspect of each transaction are record.	Under this system, both aspect of each transaction are not recorded.
In this system, Personal, Real and Nominal accounts are kept fully.	In this system, only Personal Accounts are kept and Real and Nominal Accounts are ignored.
In this system, Cash book, General ledger, Debtors’ Ledger and Creditors’ Ledger are maintained.	In this system, only Debtors’ Ledger and creditors’ Ledger are kept. Cash book is also kept but personal transaction gets mixed up with business transaction.
Under this system, arithmetical accuracy can be checked by preparing Trial Balance at any moment of time.	Under this system, arithmetical accuracy cannot be checked because to Trial Balance can be prepared.
In this system, Trading, Profit and Loss Accounts and balance sheet can be prepared.	In this system, Trading, Profit And Loss Accounts and Balance sheet cannot be prepared.
For interpretation of financial statement, we can compute different ratios, if the accounts are maintained under this system.	Vital ratios cannot be computed, if the accounts are maintained under this system.
This system is scientific and follows certain rules.	This system is unscientific and does not follow any concrete rules.

 Difference between Balance Sheet and Statement of affairs

Balance Sheet	Statement of affairs
It is a Statement of assets, Liabilities and Capital extracted from ledgers balances maintained under the double entry system.	It is a Statement of assets, Liabilities and Capital extracted from incomplete records.
In this system, Personal, Capital account is taken from the ledger.	In this system, Capital is the excess of assets over liabilities.
The basic purpose of Balance sheet is to show the financial position of the business on the last day of accounting period.	A statement of affairs is prepared to show the financial position as well as it helps in ascertaining trading profit or loss.
The financial position disclosed by a Balance Sheet is reliable.	The financial position as disclosed by a Statement of affairs is not as reliable as that disclosed by a Balance sheet.