e) Cheques for Rs.

2,000 drawn for office expenses were

not encashed till 2nd January.
f) A cheque for Rs.1,000 was issued to a creditor on 27th
December and was omitted to be entered in the Cash
Book. It was, however, presented to Bank within 31st
December.
g) Dividends amounting to Rs. 500 had been paid direct
to the Bank and not entered in the Cash Book.

You are required to make necessary corrections in the Cash Book

and starting with the amended balance, prepare a Bank Reconciliation
Statement as at 31st December, 2006.

9.7 REFERENCES/SUGGESTED READINGS

1. S.M. Shukla (1982), “Advanced Accountancy”, Sahitya

Bhavan, Agra.

2. Aggarwal, M.P. (1981), “Analysis of Financial Statements”,

Natioanl Publishing House, New Delhi.

3. Michael Tones (2002), “Accounting for Non-Specialists”, John

Wiley & Sons, Singapore.

4. Ashok Banerjee (2005), “Financial Accounting”, Excel Book,

New Delhi.

5. George Foster (2002), “Financial Statement Analysis”,

Pearson Education.

6. S.P. Jain (2001), “Corporate Accounting”, Kalayani

Publishers, New Delhi.

270
Subject: Financial Accounting-I
Course Code: BBA-104 Author: Dr. B.S. Bodla
Lesson: 10 Vetter:

SINGLE ENTRY SYSTEM

STRUCTURE

10.0 Objectives
10.1 Introduction
10.2 Salient Features
10.3 Disadvantages and Advantages of Single Entry System
10.3.1 Disadvantages
10.3.2 Advantages
10.4 Calculation of Profit or Loss
10.4.1 Increase in Net Worth Method
10.4.2 Conversion Method
10.5 Summary
10.6 Keywords
10.7 Self assessment questions
10.8 References/suggested readings

10.0 OBJECTIVES

After going through this lesson, you should be able to-

· Know the meaning, advantages and disadvantages of single
entry system.
· Differentiate single entry system and double entry system.
· Compute profit or loss under single entry system.
· Differentiate between statement of affairs and balance sheet.

271
10.1 INTRODUCTION

Single Entry System is an incomplete ‘double entry system’. In case

of double entry system of book- keeping both the aspects of every
transaction are recorded. In this system, the first entry is made to the
debit of an account, and the second entry to the credit of second account.
However, in case of single entry system, the business houses for their
convenience and more practical approach ignore the strict rules of double
entry system. The users of this system maintain only the essential
records. In other words, it is a system which may not keep some books of
subsidiary records and some ledger accounts which otherwise are kept in
case of double entry system. In fact, single entry system may consist of
double entry in respect of certain transactions such as cash paid to
creditors, cash received from debtors, etc, and single entry in regard to
certain events and transactions such as cash sales and purchases and
expenses incurred on purchase of fixed assets. Further, the users of this
system may pass no entry in respect of certain transactions, for instance,
depreciation, bad debts, etc.

According to a Dictionary of Accountancy by Kohler, “A system of

book-keeping in which as a rule only records of cash and of personal
accounts are maintained, it is always incomplete double entry varying
with the circumstances.” Thus, under the so-called single entry system
both the aspects of business transactions and events are not recorded
and, therefore, this may be defined, “as any system which is not exactly
the Double Entry System”. Under the single entry system usually a cash
book and personal accounts are maintained.

10.2 SALIENT FEATURES

From the foregoing discussion, the following salient features have

emerged about the single entry system:

272
 a) Under this system usually a cash book and personal
accounts are maintained.
b) Usually real and nominal accounts are not kept in this
system.
c) The cash book maintained, under this system usually mixes
up both the personal and the business transactions.
d) In this system, it is seen quite oftenly that in order to collect
the necessary information one has to depend on original
vouchers. For example, the amount of credit purchases may
have to be found out on the basis of original invoices received
from the suppliers in case the figures are not readily
available.
e) This system can be applied only in case of sole trader or
partnership concerns. Limited companies, because of legal
provisions, cannot keep books on single entry system.
f) It is adopted as per individual requirements and convenience
by the business houses. Therefore, the system may differ
from firm to firm, which brings lack of uniformity in
accounting books.

10.3 DISADVANTAGES AND ADVANTAGES OF SINGLE ENTRY

SYSTEM

10.3.1 Disadvantages

a) It is an incomplete system of accounting since this system

does not record both the aspects of business transactions
and events. Because of this limitation, one cannot prepare
trial balance and, thus, the arithmetical accuracy cannot be
easily checked in the absence of a trial balance. This
increases the chances of misappropriations and frauds as
compared to the Double Entry System of book-keeping.

273
 b) This system lacks uniformity since the businessmen apply it
as per their individual requirements and conveniences.
c) It becomes difficult to valuate assets in case a businessman
wanted to sell his business.
d) In the absence of complete information for sales, purchases
and other expenses, the trading and profit and loss account
cannot be prepared. Hence, rate of gross profit on sales and
the true profit or loss position cannot be known.
e) As there are no real accounts, the balance sheet cannot be
drawn up to give a correct picture of the financial position of
the business on a particular date.
f) This system hampers comparison, planning, and sound
decision-making because the system does not provide
accurate figures about the performance of the business and
its financial position.

10.3.2 Advantages

a) This system is more economical than double entry system

and hence, suitable for small business firms.
b) This system is also suitable to those firms which have more
cash transaction and a large number of personal accounts.
c) This system does not require specialised knowledge of
accounting since only selected books of accounts are kept
under it.

10.4 CALCULATION OF PROFIT OR LOSS

In case of a business maintaining accounts according to single

entry system, profit (or loss) made during the year are calculated by any
of the following two methods:
i) Increase in net worth method.
ii) Conversion method.

274
10.4.1 Increase in NetWorth Method

Under this method, profit can be calculated by comparing the net

worth in the beginning of the year and at the end of the year. Any
decrease in net worth is taken as loss, but any increase in net worth is
taken as profit. However, this is true only in the absence of any other
information. Thus, under a pure single entry system profit cannot be
calculated by preparing trading and profit and loss account. For this
purpose, we need to calculate and compare capital (net worth) in the
beginning and at the end of the year. For example, if net worth of the
st
business on 1.4.1997 is Rs. 50,50,000 and it is Rs. 52,50,000 on 31
March, 1998, it can be said that the business has made profit of Rs.
2,00,000 during the period.

In order to determine the capital in the beginning of the period and

at the end, we prepare ‘statement of affairs’. A statement of affairs is a
statement of all assets and liabilities. The excess of assets over liabilities
is taken as net worth. For calculating profit by net worth method the
following adjustments are required:
(i) Adjustment for drawings: The drawings made by proprietor
from the business for his personal use are added to the
capital at the end because drawings made during the year
will reduce the capital at the end but not the profit for the
year. In other words, accurate amount of profit (or loss) can
be known only by making adjustments, in the capital at the
end, for the drawings made.
(ii) Adjustment for capital introduced: The proprietor may
introduce fresh capital in the business during the course of
the financial year. This fresh capital is deducted from the
capital at the end because the fresh capital will increase the
capital of the proprietor at the end of the financial year, but
not the profit. Thus the increase in the capital at the end due

275
 to introduction of capital during the year should not be
misunderstood for increase in capital because of profits
made during the year.

Steps for Preparing Statement of Affairs

The procedure for preparing the Statement of Affairs can be

understood with the following steps:
a) Firstly, we are to prepare statement of affairs at the
beginning for ascertaining net worth in the beginning.
b) Secondly, we shall prepare statement of affairs at the end for
calculating net worth at the end.
c) Thirdly, make adjustments for drawings, and capital
introduced during the year.
d) In the end, deduct net worth in the beginning from the net
worth at the end. The excess of capital at the end over capital
in the beginning will denote the profit.

Illustration 1: J. Sikidar keeps her books on single entry system.

From the following particulars, prepare a statement showing profit or loss
made by her for the year ended March 31, 2006.
March 31, 2005 (Rs.) March 31, 2006 (Rs.)
Debtors 16,000 19,000
Stock 12,000 15,000
Furniture 2,000 4,000
Cash in hand 1,000 1,500
Creditors 1, 200 1,800
Bank overdraft — 2,000

During the year Sikidar introduced Rs. 10,000 as further capital in

the business and withdrew Rs. 6000

276
 Solution

st
Sikidar’s Statement of Affairs as on 31 March, 2005
Liabilities Rs. Assets Rs.
Creditors 1,200 Debtors 16,000
Capital 29,800 Stock 12,000
(Balancing Figure) Furniture 2,000
Cash in hand 1,000
31,000 31,000

st
Sikidar’s Statement of Affairs as on 31 March, 2006
Liabilities Rs. Assets Rs.
Creditors 1,800 Debtors 19,000
Bank Overdraft 2,000 Stock 15,000
Capital 35,700 Furniture 4,000
(Balancing Figure) Cash in hand 1,500
39,500 39,500

STATEMENT OF PROFIT
FOR THE YEAR ENDING 31.3.2006
Rs.
Capital as on 31.3.2006 35,700
Add Drawings made during the year 6,000
41,700
Less further capital introduced 10,000
31,700
Less capital in the beginning (31.3.2005) 29,800
Profit made during the year ending as on 31.3.2006 1,900

Illustration 2: M.R.P. Singh, who maintains his books by Single

Entry System, has submitted returns to the Income Tax Authorities
showing his income to be as follows:

277
 Rs.
st
31 Dec. 1989 3,675
,, 1990 3,700
,, 1991 3,935
,, 1992 6,875
,, 1993 6,070
,, 1994 4,630

But the Income Tax Authority is not satisfied as to the accuracy of

the accounts submitted. You are asked to help in finding their accuracy.
In this regard you are given with the following information:
i) Business assets and liabilities as on December 31, 1998
were: Debtors, Rs. 725; Cash at Bank, Rs. 4,735; Stock,
Rs. 2,710 (at market price which is 25% above cost);
Creditors, Rs. 3,660.
ii) M.R.P. Singh owed his sister, Rs. 2,000 on 31st December,
1988. On 15th March, 1991 he repaid this amount and on
1st April, 1994, he lent his sister Rs. 1,500.
iii) M.R.P. Singh owns a house which he bought in 1984 for
Rs. 10,000 and a car which he bought in 1990 for Rs. 3,750.
In 1993, he bought Rs. 5,000 shares in X Ltd. for Rs. 3,750.
iv) In 1994, Rs. 1,500 were stolen from his house.
v) M.R.P. Singh stated that his living expenses have been: Rs.
1,500; Rs. 2,000; Rs. 3,000; Rs. 3,500; Rs. 3,500; Rs. 3,500
during the years 1989, 1990, 1991, 1992, 1993 and 1994
respectively. These expenses are exclusive of the amount
stolen.
st
vi) On 31 December, 1994, the business liabilities and assets
were: Creditors Rs. 4,200; Debtors, Rs. 2,960; cash in hand,
Rs. 9,725 and stock Rs. 3,370 (at market price which shows
as gross profit of 25%).

278
 From the information submitted, prepare a statement showing
whether or not the income declared by M.R.P. Singh is accurate.

Solution

STATEMENT OF AFFAIRS
AS ON 31.12.1994
Liabilities Rs. Assets Rs.

Creditors 4,200 Cash in hand 9,725

Capital (Balancing figure) 11,013 Debtors 2,960

Stock 3,370

Less Profit 842* 2,528

15,213 15,213

3,370 ´ 25
*Profits involved in the Stock = = 842.5
100

STATEMENT OF AFFAIRS
AS ON 31.12.1998
Liabilities Rs. Assets Rs.

Creditors 3,660 Cash in hand 4,735

Capital (Balancing Figure) 3,968 Debtors 725

Stock 2,710

Less Profit 20%=542** 2,168

7,628 7,628

2710 ´ 25
**Profits involved in the Stock = = 542
125

279