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CHAPTER 17

CASH BASED SINGLE ENTRY SYSTEM OF ACCOUNTING

Introduction

So far, we have learnt about Accounting which is done on the basis of double entry (As per Dual Aspect Concept) & Accrual basis (As per Accrual Concept). This system is called Double entry system of Accounting.

Now we will learn about Accounting done on Single entry & on Cash Basis which is called Cash based Single entry System of Accounting.

A single-entry system records a transaction with a single entry and only maintains one side of every transaction. It is the oldest method of recording financial transactions and is less popular than the double entry system.

This term is used to describe the problems associated with the accounts from an incomplete transaction and is popularly called as ‘preparation of accounts from incomplete records’ the core information involves cash receipts and cash disbursements rather than asset and liability records.

The single-entry system is mainly used in the manual process of accounting and by small firms who do not have the financial capability and resources that are necessary for a full-fledged accounting system.

The single-entry method is the foundation of cash-basis accounting.

Normally, under this system records of cash and personal accounts of debtors and creditors are properly maintained, while the information relating to assets, liabilities, expenses and revenues is partially recorded. Hence, these are usually referred as incomplete records.

Cash book

In single-entry system the transactions are recorded in a cash book on a single-entry basis.

It uses columns to organize different uses of cash for your business. Cash book columns track key information about your finances.

Each transaction gets a line in the cash book.

Record the following items with the single-entry bookkeeping system:

• Date: The day the transaction takes place

• Description: A brief explanation of the transaction

• Income/expenses: The value of the transaction

• Balance: The running total of how much cash you have on hand

The first entry in the cash book should be the cash balance at the beginning of the accounting period.

During the period, record transactions as individual line items.

The last line in the cash book should be the cash balance at the end of the accounting period.

The items in your cash book will vary, depending on your business. Here is a single-entry

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Single-entry bookkeeping example for using a cash book

Features of Incomplete Records/ Single Entry

The features of incomplete records are as under:

(a) It is an unsystematic method of recording transactions.

(b) Generally, records for cash transactions and personal accounts are properly maintained.

(c) Personal transactions of owners may also be recorded in the cash book.

(d) Different organisations maintain records according to their convenience and needs, and their accounts are not comparable due to lack of uniformity.

(e) The profit or loss for the year cannot be ascertained under this system with high degree of accuracy as only an estimate of the profit earned or loss incurred can be made. The balance sheet also may not reflect the complete and true position of assets and liabilities.

Types of Single-Entry Accounting

1. Pure Single Entry:

Under this type of single entry, the dual aspect of each transaction is ignored.

Only personal accounts of debtors and creditors are kept but no record is kept for real or nominal account.

2. Simple Single Entry:

Under this system,

(i) personal account and

(ii) cash book are kept.

3. Quasi Single Entry:

Under this system,

(i) personal account,

(ii) cash book and

(iii) some other subsidiary books are kept.

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Reasons/Advantages of Using Single Entry Cash based Accounting

Small businessmen keep incomplete records because of the following reasons:

(a) This system can be adopted by people who do not have the proper knowledge of accounting principles;

(b) It is an inexpensive mode of maintaining records. Cost involved is low as specialised accountants are not appointed by the organisations;

(c) Time consumed in maintaining records is less as only a few books are maintained; and

(d) It is a convenient mode of maintaining records as the owner may record only important transactions according to the need of the business.

Limitations/Disadvantages of incomplete records

The limitations of incomplete records are as follows:

(a) As double entry system is not followed, a trial balance cannot be prepared and accuracy of accounts cannot be ensured.

(b) True Profit and Loss cannot be ascertained

(c) Theft and other losses are less likely to be detected.

(d) The owners face great difficulty in filing an insurance claim with an insurance company in case of loss of inventory by fire or theft.

(e) It becomes difficult to convince the income tax authorities about the reliability of the computed income.

Ascertainment of Profit or Loss under Single Entry System of Accounting

Every business firm wishes to ascertain the results of its operations to assess its efficiency and success and failures.

This gives rise to the need for preparing the financial statements to disclose:

(a) the profit made or loss sustained by the firm during a given period; and

(b) the amount of assets and liabilities as at the closing date of the accounting period.

Therefore, the problem faced in this situation is how to use the available information in the incomplete records to ascertain the profit or loss for the particular accounting year and to determine the financial position of a entity as at the end of the year.

This can be done in two ways:

1. Preparing the Statement of Affairs as at the beginning and as at the end of the accounting period, called statement of affairs or net worth method.

2. Preparing Trading and Profit and Loss Account and the Balance Sheet by putting the accounting records in proper order, called conversion method.

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Preparing Statement of Affairs

Under this method, statement of asset and liabilities as at the beginning and at the end of the relevant accounting period are prepared to ascertain the amount of change in the capital during the period.

Such a statement is known as statement of affairs, shows assets on one side and the liabilities on the other just as in case of a balance sheet.

The difference between the totals of the two sides (balancing figure) is the capital.

Though statement of affairs resembles balance sheet, it is not called a balance sheet because the data is not wholly based on ledger balances.

The amount of items like fixed assets, outstanding expenses, bank balances, etc. are ascertained from the relevant documents and physical count.

Once the amount of capital, both at the beginning and at the end is computed with the help of statement of affairs, a statement of profit and loss is prepared to ascertain the exact amount of profit or loss made during the year.

The difference between the opening and closing capital represents its increase or decrease which is to be adjusted for withdrawals made by the owner or any fresh capital introduced by him during the accounting period in order to arrive at the amount of profit or loss made during the period.

Statement of Affairs as at —

Liabilities

• Bills payable

• Creditors

• Outstanding expenses

• Capital (balancing figure)*

Assets

• Land and Building

• Machinery

• Furniture

• Stock

• Debtors

• Cash and Bank

• Prepaid expenses

• Capital (balancing figure)*

Note: *where the total of liabilities side is more than total of assets side, capital would be shown in assets side and it represents debit balance of capital.

Once the amount of capital, both at the beginning and at the end is computed with the help of statement of affairs, a statement of profit and loss is prepared to ascertain the exact amount of profit or loss made during the year.

The difference between the opening and closing capital represents its increase or decrease which is to be adjusted for withdrawals made by the owner or any fresh capital introduced by him during the accounting period in order to arrive at the amount of profit or loss made during the period.

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If the net result of above computation is a positive amount, it represents the profit earned during the year.

In case the net result is a negative amount, it would represent the loss sustained during the year.

The same computation can be done in the form of an equation as follows:

Profit or Loss = Capital at end – Capital at beginning + Drawings during the year – Capital introduced during the year.

For example, consider the following information extracted from the records of Mr X:

Capital at the beginning of year, i.e. April 01, 2016 RS 1,20,000

Capital at the end of year, i.e. on March 31, 2017 RS 2,00,000

Capital brought in by the proprietor during the year RS 50,000

Withdrawals by the proprietor during the year RS 30,000

The profit for the year will be calculated as follows:

The profit earned or loss incurred during a given period will be computed as follows:

Statement of Profit or Loss for the year ended ……

Calculation from the given example

Capital as on March 31, 2017 = 2,00,000

Add: Drawings during the year = 30,000

Adjusted capital at the end = 2,30,000

Less: Additional capital introduced during the year = (50,000)

Adjusted capital at the end, i.e. March 31, 2017 = 1,80,000

Less: Capital in the beginning, i.e. April 01, 2016 = (1,20,000)

Profit made during the year = 60,000

The page also presents the formula:

Profit or Loss = Capital at end – Capital at beginning + Drawings during the year – Capital introduced during the year.

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DIFFERENCE BETWEEN DOUBLE ENTRY SYSTEM AND SINGLE-ENTRY SYSTEM

YouTube Link for Lecture:

Channel Name:

Lateef’s Commerce Academy

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VISUAL CONTENT FROM THE PDF

The PDF contains several important visual elements.

Page 75 — Single-entry Cash Book Example

The table is:

Page 77 — Statement of Affairs

Liabilities:

• Bills payable

• Creditors

• Outstanding expenses

• Capital (balancing figure)*

Assets:

• Land and Building

• Machinery

• Furniture

• Stock

• Debtors

• Cash and Bank

• Prepaid expenses

• Capital (balancing figure)*

Note: where the total of liabilities side is more than total of assets side, capital would be shown in assets side and it represents debit balance of capital.

Page 78 — Statement of Profit or Loss

The visual calculation shows:

Capital as on March 31, 2017                 2,00,000
Add: Drawings during the year                  30,000
                                           ----------
                                             2,30,000
Less: Additional capital introduced          (50,000)
                                           ----------
Adjusted capital at the end                  1,80,000
Less: Capital in the beginning             (1,20,000)
                                           ----------
Profit made during the year                    60,000

Page 79 — Difference Between Double Entry and Single-Entry System

The final visual table compares the two systems on:

1. Recording of both aspects of a transaction.

2. Maintenance of personal, real and nominal accounts.

3. Books/ledgers maintained.

4. Ability to check arithmetical accuracy through a trial balance.

The table and calculation figures above were taken from the page visuals as well as the extracted text.