Accounting for Single entry and Incomplete records

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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 accountingsystem which is based on the double entry principle. The businessman is usually happywith the minimum information like the balances of cash and bank accounts and whetherhe has made a profit or loss. These people maintain rough or sketchy records that serve alimited purpose. Because, the principle of double entry is not followed, it is often referredto as a ‘single entry system’. Such system maintains only personal accounts and cashbook. Expenses and incomes are reflected in the cash book, whereas personal accountsreflect 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 undersuch 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. Assuch, 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.

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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 aprofit 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 Rs15000. He purchased goods for Rs 10000, sold the same for Rs 17000. Here, the estimate ofprofit is Rs 7000 (17000-10000) and a closing cash of Rs 22000. Another way is to find outthe increase or decrease in capital (or net assets).

This method is called statement of affairs method. The statement of affairs is similar to thebalance 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 informationavailable. Then a statement of profit or loss is prepared. This is made by considering thechanges 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 xxxxLess: opening capital balance xxxxNet increase or decrease xxxxAdd: drawings made during the year xxxxLess: fresh capital introduced during the year xxxxLess: salary to businessman xxxxProfit or Loss during the year xxxx

Illustration 1

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

Item On 31-3-2005 On 31-3-2006Creditors 55200 58500Cash at bank 600 1500Bills payable 26400 28200Bills receivables 16200 18300Debtors 45600 56000Stock in trade 31000 47300Machinery 66200 78000Computer 18000 17000

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During the year, Prakash brought in additional Rs 7500 cash in business. He withdrew goodsof Rs 2100 and cash of Rs 7200 for his personal use. Interest on opening capital is to be given at5% 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 becomputed based on statement of affairs as on 31-03-2005 and 31-03-2006. These can be workedout on the basis of information given. The balancing figures in both statements will representcapital figures as on those two days.

These figures will then be used together with the information to find out profit or loss. Theinterest 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 payable

26,400 Bills 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


Particulars Amount(Rs) Particulars Amount(Rs)

Creditors 58,500 Cash at Bank 1,500

Bills payable 28,200 Bills 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


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Illustration 2

On 1st April 2005, Neha started a beauty parlor. She acquired a shop for Rs 1200000 and paid Rs200000 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 twoyears. She has approached you to find out the business results with following information ason 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 knowledgeshe 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:


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

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

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


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Amount(Rs)Closing Capital as per statement of affairs as on 31-3-2006 1,537,000Less: Opening Capital as per statement of affairs as on31-3-2005 (1,800,000)Increase or decrease in capital (263,000)Add: drawings (2000*12*2) 48,000Net Profit or loss for the year (215,000)Note:

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

Illustration 3Rani, Priti and Deepa started a business in partnership on 1st April 2005 and agreed to shareprofits or losses in the ratio of 5:3:2. They brought in capital as – Rani Rs 50000, Priti Rs 30000and 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 Rs20400, Machinery Rs 30000, furniture Rs 9800, Loan from Central Bank Rs 20000, Building Rs70000 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 loanwas 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.


Particulars


Amount(Rs)

Creditors

140,000 Shop

1,152,000

Loan from Friend

1,000,000 Fittings

180,000 Capital (balancing figure)

1,537,000

Cash at Bank

250,000

Motor car

495,000

Stock in trade

600,000

2,677,000

2,677,000


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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


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 Bank 20,000

less: provision @ 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

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 ason 1st April 2005. We need to show the closing statement of affairs as follows:

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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 byconverting the records into double entry method. In this method, various ledger accountsare 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 correctlyinterpreted. For example, if we know opening & closing balances in debtors’ a/c and thecash 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 regularformats.

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

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

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Illustration 5

Mrs. Laxmi, a retail trader needs final accounts for the year ended 31-03-2005 for thepurpose of taking a bank loan. However, she informs you that principle of double entryhad not been followed. With following inputs, prepare a Profit & Loss a/c for the yearended 31-03-2005 and Balance sheet as on 31-03-2005. Details of receipts and payments:

1) Cash deposited in bank Rs 35002) Dividend on personal a/c deposited into bank Rs 2503) Tuition fees of Laxmi’s daughter paid by cheque Rs 45004) Rent for the year by cheque Rs 90005) Cash received from debtors Rs 52500

Dr Debtors a/c Cr

Particulars Amount

Rs Particulars Amount

Rs

To Balance b/d

34,000 By Bank (collection)

225,000

To Sales (credit)

237,000

By Balance c/d

46,000

271,000

271,000 Dr Cash / Bank A/c Cr

Particulars Amount


Rs

To Balance b/d

8,000 By creditors

160,000

To B/R encashed

18,000 By discount 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

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6) Paid to creditors Rs 400257) Salaries & wages paid in cash Rs 90008) Transportation in cash Rs 27509) Office electricity in cash Rs 6600

10) Electricity (house) in cash Rs 720011) General expenses in cash Rs 890.

Opening and closing balances of assets & liabilities:

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

To Balance b/d 55,500 By Drawings (tuition 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

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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 Cash 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 Debtors 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 Creditors 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 Mrs. Laxmi’s capital a/c Cr

)

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

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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

Dr. Profit And Loss a/c Cr.

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

Balance sheet as on 31st March 2005

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 1095000Cash sales during the year 1250000Credit purchases during the year 820000

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Details of cash expenses: Salary 48000, vehicle expenses 18000, repairs & maintenance 3000Details of expenses paid by cheque: rent 60000, telephone 15000, electricity 9000Discount allowed 250, discount received 550Amount 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

Particulars Amount


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

Particulars Amount


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

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Particulars Amount


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 Debtors a/c Cr

Particulars Amount


Rs

To Bank ( bal fig ) 905,950 By Balance b/d 89,000

To discount

550 By purchases (credit)

820,000

To Balance c/d

2,500

909,000 909,000

Dr Creditors a/c Cr

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

Particulars Amount


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

Dr Ms. Mythily’s capital a/c Cr

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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)

Creditors 2,500 Building (400000-20000) 380,000

Advance from debtors 15,000 Car (358000-71600) 286,400

Capital 725,700 Computers (70000 - 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

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Illustration 7

Raja, a sole trader furnishes you following bank summary for the year ended 31st December2005.

Particulars Rs Rs Rs Balance as on 31-12-2004 11000 Add: deposits Cash sales Collections from credit sales Income from personal investments

125000 350000 36000

511000 522000

Less: withdrawals Shop expenses Personal drawings Cheques issued to suppliers of Goods Services Cheques issued for personal purposes Bank charges

40000 20000

350000 40000

60000

390000 55000

500

505500 Balance as on 31-12-2005 16500

The following assets and liabilities existed in addition to bank balances described above onDecember 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 isdeposited in bank.

b) He had allowed cash discount of Rs 5000 to his customers for prompt payments; he wasallowed cash discount of Rs 7000 by his creditors for prompt payment.

c) Collection from customers and payments to suppliers of goods is invariably by crossedcheques.

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.

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Answer:

Working Notes:

Calculation of Total Cash salesAmount deposited in bank is Rs 125000 which is 25% of cash sales as he uses 75% for makingcash purchases.

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

Cash Book of Mr. Raja

Particulars Discount Allowed Cash Bank Particulars

Discount received Cash Bank

To Balance c/d 4000 11000

By Bank (contra) 125000

To Cash sales 500000 By Cash (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 (contra) 40000

By Bank charges 500

By drawings 55000 By purchases 375000 By Expenses 37000

By Balance c/d 7000 16500

5000 544000 522000 7000 544000 522000

Dr. Cash Book of Mr. Raja Cr.

Particulars Amount


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

Dr Debtors a/c Cr

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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

To Balance c/d 23,000 By purchases (credit) 352,000

380,000 380,000 Dr Expenses a/c Cr Particulars Amount Rs Particulars Amount Rs To Balance b/d (prepaid) 2,000

By Balance b/d (outstanding) 1,500

To cash 37,000 By P & L a/c( bal fig) 77,000 To Bank 40,000 To Balance c/d (outstanding) 2,500

By Balance c/d (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

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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

Accounting for Single entry and Incomplete records

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