Study Note - 6

Single entry system & Accounting from Incomplete Records

This Study Note includes

● Introduction
● Benefits of Single Entry System
● Weakness of Single Entry System
● The Method

6.0 Introduction
Many times small business organizations do not maintain a comprehensive accounting
system which is based on the double entry principle. The businessman is usually happy
with the minimum information like the balances of cash and bank accounts and whether
he has made a profit or loss. These people maintain rough or sketchy records that serve a
limited purpose. Because, the principle of double entry is not followed, it is often referred
to as a ‘single entry system’. Such system maintains only personal accounts and cash
book. Expenses and incomes are reflected in the cash book, whereas personal accounts
reflect the debtors’ and creditors’ position. This system usually follows the principle of
‘cash basis accounting’ and hence no accrual or non-cash entries are passed. For example,
entries like depreciation, provision for expenses, accrued incomes have no place under
such system.

6.1 Benefits of single entry system

a) It’s quick and easy to maintain.
b) One doesn’t require employing a qualified accountant.
c) This is extremely useful for business run by individuals where the volume of activity is
not large,
d) It is economical as it does not need a comprehensive record keeping.

6.2 Weaknesses of single entry system

a) As principle of double entry is not followed, the trial balance cannot be prepared. As
such, arithmetical accuracy cannot be guaranteed.
b) Profit or loss can be found out only by estimates as nominal accounts are not main-
tained.
c) It is not possible to make a balance sheet in absence of real accounts.
d) It is very difficult to detect frauds or errors.
e) Valuation of assets and liabilities is not proper.

ACCOUNTING A 189
Single entry system & Accounting from Incomplete Records

f) The external agencies like banks cannot use financial information. A bank cannot de-
cide whether to lend money or not.
g) It is quite likely that the business and personal transactions of the proprietor get mixed.

6.3 The method

As the records are incomplete, how does a businessman find out whether he has made a
profit or loss? There is no fixed methodology but some techniques can give rough calcu-
lations that help assessing the business results. Consider a businessman had cash of Rs
15000. He purchased goods for Rs 10000, sold the same for Rs 17000. Here, the estimate of
profit is Rs 7000 (17000-10000) and a closing cash of Rs 22000. Another way is to find out
the increase or decrease in capital (or net assets).
This method is called statement of affairs method. The statement of affairs is similar to the
balance sheet with regard to the format and is based on the same accounting equation of
Capital = Assets less Liabilities
The opening as well as closing statement of affairs is made on the basis of information
available. Then a statement of profit or loss is prepared. This is made by considering the
changes in capital due to additional money brought in by the businessman and the draw-
ings made by him during the period.
The statement of profit or loss is as follows:

Closing capital balance xxxx

Less: opening capital balance xxxx
Net increase or decrease xxxx
Add: drawings made during the year xxxx
Less: fresh capital introduced during the year xxxx
Less: salary to businessman xxxx
Profit or Loss during the year xxxx

Illustration 1

Mr. Prakash keeps his accounts on single entry system. He has given following information
about his assets and liabilities.

Item On 31-3-2005 On 31-3-2006

Creditors 55200 58500
Cash at bank 600 1500
Bills payable 26400 28200
Bills receivables 16200 18300
Debtors 45600 56000
Stock in trade 31000 47300
Machinery 66200 78000
Computer 18000 17000

A 190 ACCOUNTING
During the year, Prakash brought in additional Rs 7500 cash in business. He withdrew goods
of Rs 2100 and cash of Rs 7200 for his personal use. Interest on opening capital is to be given at
5% and interest on drawing is to be charged at 10%.
Prepare statement of profit or loss for the year ended 31-03-2006.
Answer:
Here the information about opening and closing capital is not given. Both these figures can be
computed based on statement of affairs as on 31-03-2005 and 31-03-2006. These can be worked
out on the basis of information given. The balancing figures in both statements will represent
capital figures as on those two days.
These figures will then be used together with the information to find out profit or loss. The
interest on capital will increase it while, interest on drawings will result in decrease in capital.
This will be included in the statement of profit or loss for the year ended 31-03-2006.
Statement of Affairs as on 31-3-2005

Particulars Amount(Rs) Particulars Amount(Rs)

Creditors 55,200 Cash at Bank 600

Bills
Bills payable 26,400 receivables 16,200
Capital (balancing
figure) 96,000 Debtors 45,600
Stock in
trade 31,000

Machinery 66,200

Computers 18,000
177,600 177,600
177,600 177,600
Statement of Affairs as on 31-3-2006
Statement of Affairs as on 31-3-2006

Particulars Amount(Rs) Particulars Amount(Rs)

Creditors 58,500 Cash at Bank 1,500
Bills
Bills payable 28,200 receivables 18,300
Capital (balancing
figure) 131,400 Debtors 56,000
Stock in
trade 47,300
Machinery 78,000
Computers 17,000
218,100 218,100

ACCOUNTING A 191
Statement of profit or loss for the year ended 31-03-2006

Single entry system & Accounting from Incomplete Records

Statement of profit or loss for the year ended 31-03-2006

Amount(Rs)
Closing Capital as per statement of affairs as on (31-3-2006) 131,400
Less: Opening Capital as per statement of affairs as on (31-3-2005) (96,000)
Increase or decrease in capital 35,400
Add: drawings (goods + cash) 9,300
Add: interest on drawings @ 10%on Rs 9300 930
Less: Interest on opening capital @ 5% (96000 * 5%) (4,800)
Less: fresh capital introduced (7,500)
Net Profit or loss for the year 33,330

Illustration 2

On 1st April 2005, Neha started a beauty parlor. She acquired a shop for Rs 1200000 and paid Rs
200000 for interior fittings. She put Rs 400000 into business bank a/c. She carried on till 31st
March 2006, when she wanted to know what the parlor has earned over the period of two
years. She has approached you to find out the business results with following information as
on 31-03-2006:
In addition to the shop and fitting she had following possessions: Stock Rs 600000 Motor car
(purchased on 30-09-2006) Rs 550000, Cash at bank Rs 250000. Based on her limited knowledge
she has told you to charge depreciation of 2% pa on shop, 5% pa on fittings and 20% on car.
On 31-3-2006, Rs 140000 was payable to creditors, and Rs 100000 to a friend for money bor-
rowed for business. She had withdrawn Rs 2000 per month from the business.
Prepare her statement of profit or loss for the two years.
Answer:

Statement of Affairs as on 31-3-2005

Particulars Amount(Rs) Particulars Amount(Rs)

Capital (balancing
figure) 1,800,000 Shop 1,200,000

Fittings 200,000

Bank 400,000

1,800,000 1,800,000

A 192 ACCOUNTING
 Statement of Affairs as on 31-3-2006

Particulars Amount(Rs) Particulars Amount(Rs)

Creditors 140,000 Shop 1,152,000

Loan from Friend 1,000,000 Fittings 180,000

Capital (balancing Cash at
figure) 1,537,000 Bank 250,000

Motor car 495,000

Stock in
trade 600,000

2,677,000 2,677,000

Statement of profit or loss for the year ended 31-03-2006

Amount(Rs)
Closing Capital as per statement of affairs as on 31-3-2006 1,537,000
Less: Opening Capital as per statement of affairs as on
31-3-2005 (1,800,000)
Increase or decrease in capital (263,000)
Add: drawings (2000*12*2) 48,000
Net Profit or loss for the year (215,000)
Note:

Depreciation calculation
Shop @ 2% for 2 years on Rs 1200000 48,000
Fittings @ 5% for 2 years on Rs 200000 20,000
Car @20% for 6 months on Rs 550000 55,000

Illustration 3
Rani, Priti and Deepa started a business in partnership on 1st April 2005 and agreed to share
profits or losses in the ratio of 5:3:2. They brought in capital as – Rani Rs 50000, Priti Rs 30000
and Deepa Rs 20000.
On 31-03-2006 their state of affairs was: Cash in hand Rs 2500, Bank Overdraft Rs 15000, credi-
tors Rs 10200, Debtors Rs 17,300 and Bills payable Rs 3500. Bills receivables Rs 4000, stock Rs
20400, Machinery Rs 30000, furniture Rs 9800, Loan from Central Bank Rs 20000, Building Rs
70000 and outstanding salaries Rs 1000.
On verification of records, it’s found that out of debtors Rs 300 is bad & should be written off.
Stocks were overvalued by Rs 400 and furniture was undervalued by Rs 200. Interest on loan
was Rs 1000. A provision of 10% on remaining debtors needs to be made.
During the year, the cash withdrawal by partners for their personal use was – Rani Rs 4500,
Priti Rs 3500 and Deepa Rs 6900. Salary of Rs 500 per month was payable to Deepa.

ACCOUNTING A 193
Single entry system & Accounting from Incomplete Records

Prepare statement of profit or loss made by the partnership firm.

Answer:
As the opening capital figures are given, there’s no need to prepare the statement of affairs as
on 1st April 2005. We need to show the closing statement of affairs as follows:

Statement of Affairs as on 31-3-2006

Particulars Amount(Rs) Particulars Amount(Rs)

Bank overdraft 15,000 Cash in hand 2,500

Creditors 10,200 Debtors 17,300

Bills payable 3,500 less: bad debts (300)

Loan from Central less: provision @
Bank 20,000 10% (1,700) 15,300
Outstanding
salaries 1,000 Bills receivables 4,000
Outstanding
interest on loan 1,000 Stock 20,400

less: overvalued (400) 20,000

Combined Capital
(balance) 101,100 Machinery 30,000

Furniture 9,800
add:
undervalued 200 10,000
Building 70,000
151,800 151,800

Statement of profit or loss for the year ended 31-03-2006

Amount(Rs)
Combined Closing Capital as per statement of affairs as on 31-3-2006 101,100
Less: Opening Capital (Rani 50, Priti 30 and Deepa 20) (100,000)
Increase or decrease in capital 1,100
Add: drawings (Rani 4500, Priti 3500 & Deepa 6900) 14,900
Less: Salary to Deepa (500*12) (6,000)
Net Profit or loss for the year 10,000

A 194 ACCOUNTING
 Note & Verification
Share of profits is Rani 5000, Priti 3000 and Deepa 2000.

Rani Priti Deepa Total

Original capital 50,000 30,000 20,000 100,000

Add : share in
profit 5,000 3,000 2,000 10,000

Add: salary 6,000 6,000

Less: drawings (4,500) (3,500) (6,900) (14,900)

Closing Capital 50,500 29,500 21,100 101,100

Alternative method: Conversion of single entry to double entry:

It may be possible to prepare the P & L a/c and balance sheet for such organizations by
converting the records into double entry method. In this method, various ledger accounts
are prepared e.g. sales, purchases, debtors, creditors, trading a/c, cash book. As full infor-
mation is not available the balancing figure in each of these accounts needs to be correctly
interpreted. For example, if we know opening & closing balances in debtors’ a/c and the
cash received from debtors; then the balancing figure will obviously indicate sales fig-
ures. Also, if we know opening and closing balances of creditors & credit purchases fig-
ures; then the balancing figure will certainly mean cash paid to creditors.
Once these figures are calculated, it’s easy to prepare the financial statements in regular
formats.
Illustration 4
Find out the collection from debtors from the following details
Opening debtors 34000
Opening Bank balance 8000
Closing debtors 46000
Closing bank balance 14000
Payments to creditors 160000
Credit sales 237000
Bills receivable encashed 18000
Bills payable paid 12000
Drawings 24000
Expenses paid 36000
Discount allowed 5000

ACCOUNTING A 195
Single entry system & Accounting from Incomplete Records

Dr Debtors a/c Cr
Amount Amount
Particulars Rs Particulars Rs
By Bank
To Balance b/d 34,000 (collection) 225,000

To Sales (credit) 237,000

By Balance c/d 46,000

271,000 271,000

Dr Cash / Bank A/c Cr

Amount Amount
Particulars Rs Particulars Rs

To Balance b/d 8,000 By creditors 160,000

By discount
To B/R encashed 18,000 allowed 5,000
To Debtors
(collection) 225,000 By B/P paid 12,000

By drawings 24,000

By Expenses 36,000

By Balance c/d 14,000

251,000 251,000

Illustration 5
Mrs. Laxmi, a retail trader needs final accounts for the year ended 31-03-2005 for the
purpose of taking a bank loan. However, she informs you that principle of double entry
had not been followed. With following inputs, prepare a Profit & Loss a/c for the year
ended 31-03-2005 and Balance sheet as on 31-03-2005. Details of receipts and payments:
1) Cash deposited in bank Rs 3500
2) Dividend on personal a/c deposited into bank Rs 250
3) Tuition fees of Laxmi’s daughter paid by cheque Rs 4500
4) Rent for the year by cheque Rs 9000
5) Cash received from debtors Rs 52500

A 196 ACCOUNTING
 6) Paid to creditors Rs 40025
7) Salaries & wages paid in cash Rs 9000
8) Transportation in cash Rs 2750
9) Office electricity in cash Rs 6600
10) Electricity (house) in cash Rs 7200
11) General expenses in cash Rs 890.

Opening and closing balances of assets & liabilities:

31-3-2004 31-3-2005
Stock 42500 22500
Bank 55500 20500
Cash 10850 10500
Debtors 16800 14800
Creditors 15600 22800
Investments 15000 15000

She also informs you that she draws Rs 6000 from bank on monthly basis and some debt-
ors deposit cheques directly in bank.

Dr Stock A/c Cr
Particulars Amount Rs Particulars Amount Rs
To Balance b/d 42,500 By cost of sales 90,135
To Purchases (credit) 47,225 By Balance c/d 22,500
To Cash (purchases) 22,910
112,635 112,635

Dr Bank A/c Cr
Particulars Amount Rs Particulars Amount Rs
By Drawings (tuition
To Balance b/d 55,500 fees) 4,500
To Cash 3,500 By Rent 9,000
To Capital (dividend) 250 By creditors 40,025
To Debtors 86,775 By Drawings (@ 6000 pm) 72,000
By Balance c/d 20,500
146,025 146,025

ACCOUNTING A 197
Single entry system & Accounting from Incomplete Records

Dr Cash A/c Cr
Particulars Amount Rs Particulars Amount Rs
To Balance b/d 10,850 By bank 3,500
To Debtors 52,500 By salaries & wages 9,000
By Transportation 2,750
By Electricity 6,600
By drawings (electricity) 7,200
By general expenses 890
By Purchases 22,910
By Balance c/d 10,500
63,350 63,350

Dr Debtors A/c Cr
Particulars Amount Rs Particulars Amount Rs
To Balance b/d 16,800 By Cash 52,500
To sales (credit Sales) 137,275 By Bank 86,775
By Balance c/d 14,800
154,075 154,075
Dr Creditors A/c Cr
Particulars Amount Rs Particulars Amount Rs
To Bank 40,025 By Balance b/d 15,600
To Balance c/d 22,800 By purchases (credit) 47,225

62,825 62,825
Dr Mrs. Laxmi’s capital a/c Cr
Particulars Amount Rs Particulars Amount Rs
To Drawings (tuition fees) 4,500 By Balance b/d 125,050
To Drawings (electricity) 7,200 By Bank (dividend0) 250
To Drawings (bank) 72,000
To Balance c/d 41,600

125,300 125,300
Dr Trading a/c Cr
Particulars Amount Rs Particulars Amount Rs
To Opening stock 42500 By sales 137,275
To Purchases 70135 By closing sock 22500

To Gross profit 47140

159775 159775

A 198 ACCOUNTING
 Dr. Profit And Loss a/c Cr.
Particulars Amount Rs Particulars Amount Rs
To rent 9000
To Salary & wages 9000 By Gross Profit 47140
To Transportation 2750
To Electricity 6600
To General Expenses 890
To Net Profit 18900

47140 47140
Balance sheet as on 31st March 2005
Particulars Amount(Rs) Particulars Amount(Rs)
Creditors 22,800 Stock 22,500
Capital (balancing
figure) 41,600 Bank 20,500
Net profit 18,900 Cash 10,500
Debtors 14,800
Investment 15,000
83,300 83,300

Illustration 6

Ms. Mythily who maintained books under single entry method approaches you with the fol-
lowing details. You are requested to prepare statement of affairs as on31-03-2006 and P & L a/
c for the year ended 31-3-2006.

31-3-2005 31-3-2006
Cash 1500 8500
Saving a/c with ICICI 2000 10000
Debtors 42000 85000
Advance received 15000
Creditors 89000 2500
Advance paid 50000
Building (depreciate 5%) 400000 ??
Car (depreciate 20%) 358000 ??
Computer (depreciate 60%) 70000 ??

Credit sales during the year 1095000

Cash sales during the year 1250000
Credit purchases during the year 820000

ACCOUNTING A 199
Single entry system & Accounting from Incomplete Records

Details of cash expenses: Salary 48000, vehicle expenses 18000, repairs & maintenance 3000
Details of expenses paid by cheque: rent 60000, telephone 15000, electricity 9000
Discount allowed 250, discount received 550
Amount received from debtors was deposited into bank.
Advance was paid by cheque and advance received was also in the bank.
Drawings in cash 40000, drawings through bank ????
Cash purchases during the year ????

Answer:
Dr ICICI Bank a/c Cr
Amount Amount
Particulars Rs Particulars Rs

To Balance b/d 2,000 By Telephone 15,000

To Cash (from
customers) 1,051,750 By Rent 60,000
To Advance from
Debtors 15,000 By Electricity 9,000
By Drawings
( balancing figure ) 18,800
By Advance to
suppliers 50,000

By creditors 905,950

By Balance c/d 10,000

1,068,750 1,068,750

Dr Cash a/c Cr
Amount Amount
Particulars Rs Particulars Rs

To Balance b/d 1,500 By salaries 48,000

To Sales 1,250,000 By Vehicle expenses 18,000
By Repairs 3,000
By drawings 40,000
By cash purchase 1,134,000
By Balance c/d 8,500

1,251,500 1,251,500

A 200 ACCOUNTING
 Dr Debtors a/c Cr
Amount Amount
Particulars Rs Particulars Rs
To Balance b/d 42,000 By discount 250
To sales (credit Sales) 1,095,000 By Bank ( bal fig ) 1,051,750
By Balance c/d 85,000

1,137,000 1,137,000

Dr Creditors a/c Cr
Amount Amount
Particulars Rs Particulars Rs
To Bank ( bal fig ) 905,950 By Balance b/d 89,000
By purchases
To discount 550 (credit) 820,000

To Balance c/d 2,500

909,000 909,000

Balance Sheet as on 31/03/05

Liabilities Amount Assets Amount
Capital (Bal. Fig.) 784500 Building 400000
Creditors 89000 Car 358000
Computer 70000
Debtors 42000
Cash 1500
Bank 2000
Total 873500 Total 873500

Dr Ms. Mythily’s capital a/c Cr

Amount Amount
Particulars Rs Particulars Rs

To Drawings (cash) 40,000 By Balance b/d 784,500

To Drawings (bank) 18,800
To Balance c/d 725,700
784,500 784,500

ACCOUNTING A 201
Single entry system & Accounting from Incomplete Records

Dr Trading and P & L a/c Cr

Particulars Amount Rs Particulars Amount Rs
To Purchases cash 1,134,000 By sales credit 1,095,000
To Purchases credit 820,000 By sales cash 1,250,000
To Salary 48,000 By discount 550
To Vehicle expenses 18,000
To Repairs &
maintenance 3,000
To Rent 60,000
To telephone 15,000
To electricity 9,000
To Discount 250
To depreciation on
building 20,000
To depreciation on
car 71,600
To depreciation on
computer 42,000
To Net profit 104,700
2,345,550 2,345,550

Statement of Affairs as on 31st March 2006

Particulars Amount(Rs) Particulars Amount(Rs)

Building (400000-
Creditors 2,500 20000) 380,000
Advance from
debtors 15,000 Car (358000-71600) 286,400
Computers (70000 -
Capital 725,700 42000) 28,000
Net profit 104,700 ICICI Bank 10,000
Cash 8,500
Debtors 85,000
Advance to
suppliers 50,000
847,900 847,900

A 202 ACCOUNTING
Illustration 7

Raja, a sole trader furnishes you following bank summary for the year ended 31st December
2005.
Particulars Rs Rs Rs
Balance as on 31-12-2004 11000
Add: deposits
Cash sales 125000
Collections from credit sales 350000
Income from personal investments 36000 511000
522000
Less: withdrawals
Shop expenses 40000
Personal drawings 20000 60000
Cheques issued to suppliers of
Goods 350000
Services 40000 390000
Cheques issued for personal purposes 55000
Bank charges 500 505500
Balance as on 31-12-2005 16500

The following assets and liabilities existed in addition to bank balances described above on
December 31st:
31-12-2005 31-12-2004
Cash 7000 4000
Due from customers
Considered good 37000 27500
Inventory at cost 13000 10000
Prepaid expenses 3000 2000
Creditors for goods 23000 28000
Creditors for services 2500 1500
He also informs you that

a) He uses 75% of cash sale proceeds for making cash purchases; the remaining balance is
deposited in bank.
b) He had allowed cash discount of Rs 5000 to his customers for prompt payments; he was
allowed cash discount of Rs 7000 by his creditors for prompt payment.
c) Collection from customers and payments to suppliers of goods is invariably by crossed
cheques.
Prepare cash book with cash & bank columns, Trading and P & L a/c for the year ended 31-12-
2005 and the balance sheet as on that date.

ACCOUNTING A 203
Single entry system & Accounting from Incomplete Records

Answer:

Working Notes:
Calculation of Total Cash sales
Amount deposited in bank is Rs 125000 which is 25% of cash sales as he uses 75% for making
cash purchases.

So the total cash sales is (125000 / 25%) Rs 500000

Dr. Cash of
Cash Book Book
Mr.of Mr. Raja
Raja Cr.

Discount Discount
Particulars Allowed Cash Bank Particulars received Cash Bank
To Balance By Bank
c/d 4000 11000 (contra) 125000
By Cash
To Cash sales 500000 (contra) 40000
To Cash
(Contra) 125000 By Drawing 20000
To Debtors 5000 350000 By creditors 7000 350000
To Capital 36000 By expenses 40000
To Bank By Bank
(contra) 40000 charges 500
By drawings 55000
By purchases 375000
By Expenses 37000
By Balance
c/d 7000 16500
5000 544000 522000 7000 544000 522000

Dr Debtors a/c Cr
Amount Amount
Particulars Rs Particulars Rs

To Balance b/d 27,500 By Bank 350,000

To Sales (credit) 364,500 By discount allowed 5,000

By Balance c/d 37,000

392,000 392,000

A 204 ACCOUNTING
 Dr Creditors a/c Cr
Particulars Amount Rs Particulars Amount Rs
To Bank 350,000 By Balance b/d 28,000
To discount 7,000
By purchases
To Balance c/d 23,000 (credit) 352,000

380,000 380,000

Dr Expenses a/c Cr
Particulars Amount Rs Particulars Amount Rs
To Balance b/d By Balance b/d
(prepaid) 2,000 (outstanding) 1,500
To cash 37,000 By P & L a/c( bal fig) 77,000
To Bank 40,000
To Balance c/d By Balance c/d
(outstanding) 2,500 (prepaid) 3,000

81,500 81,500

Balance Sheet as on 31st March 2004

Particulars Amount(Rs) Particulars Amount(Rs)
Creditors 28,000 Cash 4,000
Outstanding expenses 1,500 Bank 11,000
Capital (balancing
figure) 25,000 Debtors 27,500
Stock 10,000
Prepaid expenses 2,000

54,500 54,500

Dr Raja's capital a/c Cr

Particulars Amount Rs Particulars Amount Rs
To Drawings (bank) 20,000 By Balance b/d 25,000
To Drawings (bank) 55,000 By Bank 36,000
By P & L 65,000
To Balance c/d 51,000

126,000 126,000

ACCOUNTING A 205
Single entry system & Accounting from Incomplete Records

Dr Trading and P & L a/c Cr

Particulars Amount Rs Particulars Amount Rs
To Opening Stock 10,000 By Sales
To Purchases Cash 500,000
Cash 375,000 Credit 364,500
Credit 352,000 By closing stock 13,000
To gross profit c/d 140,500
877,500 877,500
To Expenses 77,000 By gross profit b/d 140,500
To Discount allowed 5,000 By discount received 7,000
To Bank charges 500
To Net profit carried to
capital 65,000

147500 147500

Balance Sheet as on 31st December 2005

Particulars Amount(Rs) Particulars Amount(Rs)

Creditors 23,000 Cash 7,000
Outstanding expenses 2,500 Bank 16,500
Capital 51,000 Debtors 37,000
Net profit Stock 13,000
Prepaid expenses 3,000

76,500 76,500

A 206 ACCOUNTING