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Business transactions are recorded in two different ways, one is double entry system and another one is single entry system.
All business transactions are has two aspects namely Debit and Credit, If these two aspects of a transaction are recorded, which system is known as the Double entry system.
The term single entry is vaguely used to refer to any method of maintaining accounts which does not conform to strict principles of double entry system, under single entry method only one aspect of a transaction is recorded, it may be debit without a corresponding credit and vice versa. This system is not based on any scientific system therefore it cannot be termed as a system, It is incomplete and unsatisfactory system and it is clear that accurate information of the operations of the business is entirely lacking.
SALIENT FEATURES OF SINGLE ENTRY SYSTEM
Some features of single entry system.
i) The system is suitable for sole trader, partnership firms and professionals.
ii) In this system, usually personal accounts are fully written and cash book is also maintained and ignore all other accounts.
iii) This system does not follow uniformity .It is highly flexible accounting to the capabilities of individuals maintaining the records.
iv)This system needs very few numbers of account books and it gives only partial information.
v) When preparing cash book under this system both personal and business transactions are recorded.
vi) In this system to know the total purchases and sales, one has to depend on original vouchers.
DEFECTS OF SINGLE ENTRY SYSTEM
Some of the defects of single entry system.
i) It is not a scientific method of accounting.
ii) Frauds can be committed easily
iii) It is difficult to ascertain the value of the business
iv) It is very difficult to say whether the business is making progress or working at a loss
v) The Trading and profit and loss account and balance sheet cannot be prepared in a scientific manner
vi) The trading results of one period cannot be compared with those of the other period.
vii) Impersonal accounts such as sales account, purchases account as well as assets account are not available.
METHODS OF ASCERTAINMENT OF PROFIT OR LOSS UNDER SINGLE ENTRY SYSTEM:
There are two methods of ascertaining profit or loss under the single entry system, they are:
(a) Comparison method (or) Net worth Method (or) statement of affair method (b) Conversion Method.
Comparison method (or) statement of affair method
Under this method the profit or loss is ascertained by comparing the capital at the beginning with the capital at the end of the period. The closing capital is taken; drawings should be added to this; from this total the additional capital if any introduced should be subtracted; from this total the opening capital should be subtracted. The answer so obtained will be the profit or loss (before adjustment) earned during the year.
Conversion Method
The process of collecting, computing and recording missing information along with the available data in the incomplete books of a business is called “conversion method”. Once the books are “converted”, all future transactions can be recorded as per “double entry system”. Conversion to double entry system enables a business to avoid the harassment of taxation authorities and ensures better management of the business.
Procedure for conversion
The following are the steps to be followed for conversion of incomplete records to complete record system (Double entry system)
1. A statement of affairs at the beginning of the year should be prepared. The balance in the statement represents opening capital.
2. Single or double column cash book should be prepared to find out missing items like opening cash, closing cash, cash sales, cash purchase, additional capital and drawings etc. Any shortage on the debit side can be cash sales or additional capital introduced or opening cash. Shortage on the credit site can be cash purchase or drawings or sundry expenses or closing cash balance.
3. Impersonal accounts like total debtors account ,total creditors account , Bills receivables account and Bills payable account should be prepared .preparation of these accounts can help in finding any missing items like opening or closing debtors, opening or closing creditors, credit sales and credit purchases
4. Appropriate journal entry should be passed in respect of assets and liabilities included in the opening statement of affairs.
5. Real and nominal accounts must be written from the information recorded in the cash book, total debtors account, total creditors account, etc. The double effect of every entry must be posted to the ledger, opening new accounts wherever necessary.
6. From all the accounts balance in the ledger and any other additional details trading account, profit and loss account and balance sheet must be prepared.
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