An analysis of single entry system

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Table of Contents

1.Introduction

2.Single Entry System

2.1.Features of Single Entry System

2.2.Types of Single Entry System

2.3.Reasons for maintaining single entry system

2.4.Calculation of missing figures

2.5.Advantages and disadvantages of the Single Entry System

2.6.Suggestions to prevent loss of data

3.Conclusion

4.References

1. Introduction

This assignment explores the Single Entry or Incomplete system of maintaining records and its application. After a brief outline of the single entry system and its salient features, the assignment then explores the various types of single entry system and the key differences between the types. In addition, a detailed examination of why single entry systems are used and the method to compute the missing figures in order to arrive at the profit/loss of the company is also undertaken which is then applied to the case study. The assignment concludes with the various advantages and disadvantages of using the single entry system and suggestions to prevent the loss of accounting data due to contingencies.

2. Single Entry System

As stated by Kohler (1970) “Single Entry System is a system of book keeping in which as a rule only records of cash and personal accounts are maintained, it is always incomplete double entry varying with circumstances.”

In the single entry system of book keeping, all the transactions are maintained in the books of accounts and it is considered as incomplete as the double effect as recorded in the double entry system is not maintained in this system of book keeping.

Since the single entry system fails to maintain a record of real and nominal accounts and only takes into account only personal account, it is regarded as inaccurate, unscientific, unsystematic and faulty.

2.1. Features of Single Entry System

Some of the features of incomplete records are as follows -

  1. Incompleteness – Since the transactions are recorded without taken the dual aspect of accounting into consideration, it is incomplete and unscientific.
  2. Personal Accounts – The single entry system only takes into account the personal account while preparing the records. Generally, the cash book and debtors/creditors account are maintained in this system.
  3. Restrictions in usage – Corporations are not allowed to use this system of accounting. It can only be used by smaller entities such as sole traders and partnerships.
  4. No separation in cash and credit transactions – the books of accounts under this method, generally include both cash and credit transactions.
  5. Omission of transactions – Not all transactions are recorded systematically in the books of accounts and often some transactions are omitted
  6. Estimate profit – Under this method, due to incomplete records, the true net income is not represented.

2.2. Types of Single Entry System

There are three types under this method

  1. Pure – Only personal accounts (debtors/creditors) are recorded
  2. Simple – Both personal account (debtors/creditors) and cash book are maintained
  3. Quasi - Both personal account and cash book are maintained along with some other books like purchase and sales books, returns book etc.

2.3. Reasons for maintaining single entry system

There could be a variety of reasons why a firm could adopt the single entry system. For instance, a sole proprietor may not have the knowledge and the skills to maintain his books according to the double entry system of bookkeeping and will find the single entry system to be more convenient and simple. In addition, smaller companies may not have the task force to devote time and effort for maintaining uniform, timely and systematic books as per the double entry system. the Another reason could be that the proprietor chooses to follow the single entry system due to various loop holes it provides to minimize tax on the business. Various contingencies such as loss due to theft or from natural disasters could also lead to incomplete records.

2.4. Calculation of missing figures

It is essential for an entity to analyze its profit or loss and the status of its assets and liabilities during a period in order to assess its performance and efficiency. Since the books have not been maintained using the double entry system, in order to prepare the income statement and balance sheet, various missing figures have to be calculated in the incomplete records method. For instance, the proprietor may not record his drawings from the business, however there might be certain other figures which can be used to calculate the drawings.

After calculation of the missing figures, the entity can prepare the statement of affairs at the start and end of the accounting period to arrive at the profit and loss, and then calculate changes in the owner’s equity. Once these figures have been calculated, the profit and loss account and the balance sheet can be prepared.

The steps required to calculate the missing are as follows.

2.4.1. Statement of Affairs

The assets and liabilities of the company both at the start and the end of the accounting period are analyzed to calculate changes in the owner’s equity. In this statement, similar to the balance sheet, the assets are shown in one column and the liabilities in another column. Then a statement is prepared to arrive at the profit for the accounting period.

The following accounting equation is used:

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Step 1 – Computation of cash sales

The various cash transactions i.e. cash outflow and inflows are recorded in the cash account. The balancing figure in the account will be cash sales, opening balance, drawings or closing balance depending on the missing figure.

Cash Book (Cash)

Dr. Cr.

OMR

OMR

To balance b/f

1,000

By bank

10,000

To sales (balancing figure)

24,000

By salaries

4,000

By creditors

2,000

By drawings

8,000

By balance c/d

1,000

25,000

25,000

Hence, cash sales are OMR 24,000.

Step 2 - Computation of Opening Bank Balance

The inflows and outflows from the bank are recorded in the Bank account. The balancing figure will be the bank balance in the beginning or end or loan depending upon the missing figure.

Cash Book (Bank)

Dr. Cr.

OMR

OMR

To cash

10,000

By balance b/f (bal. figure)

5,000

To debtors

75,000

By creditors

70,000

To Bank Loan

10,000

By business expenses

12,000

By balance c/d

8,000

95,000

95,000

Hence the opening bank balance is OMR 5,000. Since it is on the credit side, it can be understood that it is an overdraft.

Step 3 – Preparation of Total Creditors accounts

The creditors account can be prepared by recording the money paid to the creditors and opening and closing balance. In this case it can be used to find the credit purchases which is the balancing figure.

Total Creditors Account

Dr. Cr.

OMR

OMR

To bank

70,000

By balance b/f

4,000

To cash

2,000

By Cr. purchases (bal. figure)

77,000

To balance c/f

9,000

81,000

81,000

Hence credit purchases are OMR 77,000.

Step 4 - Preparation of Total Debtors accounts

The debtors account can be prepared by recording the money owed by the debtors and opening and closing balance. In this case it can be used to find the credit sales which is the balancing figure.

Total Debtors Account

Dr. Cr.

OMR

OMR

To balance b/f

10,000

By bank

75,000

To credit sales (bal. figure)

100,000

By balance c/f

35,000

110,000

110,000

Hence credit sales are OMR 100,000.

Step 5 Preparation of Statement of Affairs to compute opening capital

The statement of affairs can be prepared once the missing figures have been computed with the liabilities in one column and assets in another column. It can be used to compute the opening capital of the entity.

Nasser

Statement of Affairs as on 1st January 2014

Liabilities

OMR

Assets

31.12.2014

Sundry Creditors

4,000

Cash in Hand

1,000

Bank Overdraft (step 2)

5,000

Sundry Debtors

10,000

Capital (balancing figure)

30,000

Stock of goods

28,000

39,000

39,000

Step 6 – Preparation of Final account

Nasser Profit and Loss account for the year ending 31st December, 2014

OMR

OMR

To Opening stock

28,000

By sales

Cash sales (Step 1) 25,000

Credit sales ( Step 4) 100,000

125,000

To purchase (step 3)

77,000

Closing Stock of goods

11,250

To Gross profit

33 1/3% on cost = ¼ on sales

= ¼ of 125,000

31,250

136,250

136,250

To Salaries

4,000

By Gross profit b/f

31,250

To Business Expenses

12,000

To interest on Bank Loan

1,000

To net profit

14,250

31,250

31,250

Hence, Nasser’s Gross profit for the ear ending 31st December, 2014 is 31,250 and his net profit is 14,250

2.5. Advantages and disadvantages of the Single Entry System

Advantages

One of the main advantages with using the single entry system is the relative ease with which the accounts can be prepared. A sole proprietor or partner without advance accounting skills can continue to maintain track of their accounts using this method. This also aids in making this system less expensive as the entity need not hire professional accounting staff to manage the accounts of the company and it also makes the computation of profit and loss relatively simple and straight forward. Hence, the single entry system would be a suitable system for maintaining the accounts of small firms.

Disadvantages

One of the main drawbacks of the system is that it is not accurate, systematic or scientific. The single entry system does not have a fixed set of rules that need to be followed while preparing the accounts as compared to the double entry system. Hence, the probability of lack of uniformity, fraud, misappropriation of assets and inaccuracy are very high. In addition, due to the lack of the accounting via the dual system, this system of accounting is regarded as incomplete and makes it difficult to ascertain goodwill and the financial position of the company. The single entry system only maintains personal accounts and does not keep a record of real and personal accounts, thereby affecting the reflection of the profit and loss as well as the financial position of the company. In addition, due to the incompleteness of the system, it cannot be used for tax purposed. This will also make it difficult for the management to plan strategies and manage the business and lead to substandard administration as the performance of the company cannot be compared over the years. Moreover, under this system, if there is a theft or loss, it will relatively harder to detect. Hence, the single entry system is more appropriate for small firms and not suitable for larger corporations that need to maintain more accurate and clear accounts.

2.6. Suggestions to prevent loss of data

One way in which an entity can protect against the loss of data is by using accounting information systems (AIS). As stated by Amy Fontinelle (2014) The AIS “is a structure that a business uses to collect, store, manage, process, retrieve and report its financial data so that it can be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors and regulatory and tax agencies”. The AIS therefore maintains security of data. These systems also need online protection in the form of anti-virus, firewalls etc. This data also needs to be backed up on a timely and fixed basis so that it can be retrieved if lost.

Additionally, a firm should have internal controls to prevent misappropriation, fraud from theft etc. These internal controls will see that the financial statements are prepared clearly and it is complete. They also state the accounting rules to be followed by the company including when the backups should be done, who should have access to the QuickBooks. The double entry system also helps to protect the firm against fraud and misappropriation as the accounting data can be compared against the balances and journal entries thereby making it difficult to manipulate it.

The manager of the company can also have an outside accountant like a CPA review the statements and suggest better practices and learn how to maintain the accounts to minimize fraud and misappropriation.

3. Conclusion

Hence, it can be seen that the Singly Entry system of accounting is more suitable for smaller organizations that do not have the skills and experience to use the double entry system. Although it is more convenient, less expensive and simple, the disadvantages of the Single Entry system far outweigh its advantages. This has been explained in detail in the assignment along with the steps required to calculate the profit and loss.

Using this, a step by step calculation of Nasser’s Opening Capital (OMR 30,000), Gross Profit (OMR 31,250) and Net Profit (OMR 14,250) was done. Further to this the prospects of using the single entry system along with suggestions to prevent the loss of accounting data has also been explained in detail.

4. References

  • Kohler, E. L. (1970). A dictionary for Accountants. Englewood Cliffs: Prentice-Hall.
  • Hanif et al. (2003). Financial Accounting. India: Tata - McGraw Hill Pubicaton. p21-23.
  • Jayapandian, S. (2004). Financial Accouning from Zero. India: Excel Books. p24-33.
  • Baker, J (2008). 20th Century Bookkeeping and Accounting. Russia: Ripol Classic Publishing House. p289-291.
  • Maheshwari, S (2009). Fundamentals of Accounting for Cpt. India: Vikas Publishing House Pvt Ltd. p45-48.

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