Single Entry System of Accouting

Savita Mahendru

Asst Lecturer in Commerce�HRMMV

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 Meaning of Basis of Accounting

The Basis of Accounting is related to the timing of recording the business transaction in the books of account. It is concerned with a specific time period at which all the incomes and expenses are recorded by a business enterprise. There are two bases for recording the transactions in Accountancy:

• Cash Basis
• Accrual Basis

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1. Cash Basis of Accounting

• The cash basis records only cash transactions, i.e., all the expenses paid in cash and all the revenues that have been received in cash. No credit transactions are recorded in cash basis accounting system. This means that there are no records of income receivables and expenses payable. Thus, the profit on a cash basis is the difference between the cash receipt and the cash payments. Moreover, taxes on income are paid on the receipt of cash and not when the income is accrued. The cash basis of accounting is suitable for the professionals such as lawyers, doctors, etc.

2. Accrual Basis of Accounting

• The accrual basis records all business transactions, whether cash or credit transactions. This means incomes are recorded as soon as they are accrued, irrespective of the fact whether cash is received or not. Similarly, expenses are recorded when they become due even though not yet been paid. This basis takes into consideration all the outstanding expenses and accrued revenues. Thus, profit under this basis is the difference between all the income earned (received in cash or not) and all the expenses incurred (paid in cash or not) during the period.  Taxes on income gets due as soon as income is earned. The accrual basis is suitable for all the business units working with an objective to earn profit.

Single Entry System

• A single entry system is a system of bookkeeping that considers only one aspect of all financial transactions, which means that transactions affect only one account. Under this system, value of only one account will increase or decrease according to the nature of the transaction taken into consideration.
• The accounting details are maintained only by preparing a cash book and personal accounts of debtors and creditors, and real and nominal accounts are not recognized under this system of bookkeeping.
• The profit ascertained under the single entry system is pretty inaccurate, as only one aspect of all the transactions is taken into account.
• Preferably, small businesses and shopkeepers adopt this method of bookkeeping, as there are no set rules to maintain the accounts, hence is comparatively much easier than the double-entry system. Accounting records maintained under this system are also known as incomplete records.

Single Entry System Example

Special Features:

The following are the special features of single entry system :

1. Unsuitable for big business :This system is suitable only for small business carried on proprietary or partnership basis. Big businesses especially Joint Stock companies cannot afford to maintain accounts as per this system, which is defective and unscientific.
2. Only personal and cash Accounts : Under this system only the personal accounts of debtors and creditors as well as cash and bank accounts are maintained. The impersonal accounts (i.e. real & nominal accounts) are not maintained.
3. Incomplete account keeping : This system records double effect of only some transactions. It record only the single aspect of many transactions while it fails to records few other transactions. Hence it is incomplete, defective and crude system.
4. Variations : The single entry system of accounting varies from business to business. Hence it lacks uniformity.
5. Flexible : No rigid rules and principles are followed under this system.

Double Entry System

• A double entry system of bookkeeping considers at least two aspects of all the financial transactions of a business unit. Under this system, at least two accounts are affected in opposite directions, i.e, one of them is debited and another one is credited with an equal amount.
• The three basic accounts- personal account, real account, and nominal account are all recognized under the double entry system, and hence, a profit ascertained is much more accurate and can reflect a real financial position of a business enterprise. Generally, professionals are hired to maintain accounts under this system, as a strict set of rules is to be followed.
• A trial balance can be prepared under this system of bookkeeping, which makes it possible to check the arithmetic accuracy of the accounting records as the debit side is always equal to the credit side under the double entry system. Under the double entry system, all the necessary accounts, like Journal, Ledger, Trial Balance, Financial Statement, and Balance Sheet are prepared to compute the profit and know about the financial position of any business unit.

Difference between Single Entry System and Double Entry System:

Statement of Affairs

A statement of affairs, like a balance sheet, is a statement which shows the assets and liabilities of a concern on a particular date and reveals its financial state of affairs. Many of the assets and liabilities shown on this statement are based on the estimates made by the proprietor. They are not based on book values as in case of balance sheet. Statement of affairs is prepared to ascertain the financial position and capital investments in the organisation where books of accounts are not properly maintained or may be destroyed. The values of various assets and liabilities of the concern are ascertained as under

i) Cash in hand: It is ascertained from cash book or through physical verification of cash in hand

ii) Cash with bank: It is ascertained by balancing cash book. In case the cash book has no bank column it is confirmed on the basis of pass book or bank records.

iii) Debtors & creditors: They are calculated from the personal ledgers maintained by the concern.

iv) Stock in trade: It is valued on the basis of actual stock taking and valuation.

v) Fixed Assets: The values of fixed assets owned by concern like furniture, machinery & equipments, buildings, vehicles etc., are judged from available records or by estimates.

vi) Other values: The other values such as outstanding expenses and incomes, prepaid expenses, loans and incomes received in advance etc., are found from available records and memory of proprietor or partners.

vii) Capital : Finally, the excess of assets over liabilities is taken as capital.

Types of Single-Entry Systems

• One Simple Entry

The simple single entry account is a reinterpretation of a double-entry system. It includes personal and cash accounts, and we use just these two accounts for entries.

• Pure Single Entry

Single-entry bookkeeping does not include information about sales, bank balances, purchases, or cash. This only includes personal accounts. It does not provide information about cash transactions and daily transactions. So, it is not practical.

• Quasi Single Entry

This type of accounting includes personal and cash accounts. We can also maintain other subsidiary accounts, including sales, purchases and billing books. The personal account also records discounts. You can also access vital information such as wages, rent and salaries. This is a replacement for double-entry accounting systems. We can see that the single-entry system combines single-entry, double entries and no entry.

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Characteristics of the single-entry system of bookkeeping

• Proper vouchers or source documents

Vouchers refer to documents specially prepared for recording the transactions. A separate voucher is prepared for every transaction, and it specifies which account is to be debited or credited.

• Use of cash-based bookkeeping

According to the single-entry system, only cash-based bookkeeping that tracks incoming and outgoing cash in a journal is maintained, but no other ledger is maintained. Businesses record cash-related transactions like invoices, receipts, and payments in the cash book.

• Use of personal account

This system of bookkeeping uses only personal accounts for determining the credit sales and purchases during a period. Personal accounts of creditors and debtors are maintained, ignoring the nominal and real accounts.

• Absence of fixed rules or principles

In this system of cash-based bookkeeping, there are no proper fixed rules or principles applicable for determining profits and preparing financial statements. Therefore, it is easy to maintain records as per this system.

• Preparation of final accounts 

Under this system, instead of a balance sheet, the statement of accounts is prepared as the proper information regarding real and nominal accounts is unavailable.

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Advantages

These are the key advantages of a single-entry system for bookkeeping:

1.Simplicity

• Single-entry bookkeeping allows for more straightforward accounting procedures as individuals and businesses only record one entry per month. The single-entry bookkeeping procedure is simple enough for people to use with little or no accounting experience.
• Small businesses may find the simplicity of single-entry bookkeeping appealing, especially if they don't have the resources to hire a full-time accountant. The single-entry system is beneficial for business owners or employees to maintain the books.

2. Ideal for Small Businesses and Startups

• Small businesses and startups may find single-entry systems advantageous because they can only focus on profit and loss tracking. Single-entry bookkeeping allows smaller businesses to keep their finances organised and straightforwardly.
• Startups and small businesses are less likely to have a strong financial record. Single-entry bookkeeping is more attractive because it requires fewer transactions that need tracking. One-entry bookkeeping is perfect for a startup or small business, but it can change to double-entry as the company grows.

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3.No Tools are Required

• A single-entry system requires only a pencil and paper. Single-entry bookkeeping is a cost-effective way to save money for small businesses, and it tracks only revenue and expenses. Single-entry bookkeeping is perfect for manual accounting systems.

4. Financial Maintenance is Easier

• Small businesses and startups also have the advantage of single-entry bookkeeping. This allows them to see all funds coming in and going out. This will enable companies to spot any problems in their financial records and make necessary changes.
• A single-entry bookkeeping system can help a company determine if it is spending too much on one aspect of its business. Single-entry bookkeeping is a great way for companies to find ways to reduce costs and improve their financial health. Also, our master tip would be learning how to write a business plan to narrow the path to attaining success.

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Drawbacks

• Single-entry bookkeeping does not include financial accounts such as accounts receivable (money due to you), inventory or accounts payable. You cannot use single-entry bookkeeping to create your cash flow statement and balance sheet.
• To get a complete picture of your business finances, it is important to have your balance sheets, income statement and cash flow statements. The single-entry system has a disadvantage because it is more difficult to track assets and liabilities. Even money you don't have yet (accounts receivables) counts as an asset; however, due debts count as liabilities.
• Single-entry bookkeeping records income if you take out business loans. If you use a double-entry bookkeeping system, the loan would be recorded as a liability (money that you owe), giving you a better picture of your total debt.
• Double-entry bookkeeping also makes it easier to match the expenses of producing your product/service with the necessary payment. A single-entry system won't be able to match up expenses and payments if they occur in different accounting periods, such as if you sent the invoice at the end of each month.
• Single-entry bookkeeping also makes it more difficult to identify fraud or spot errors in your accounting. Double-entry accounting requires that debits and credit match, so you will notice when they are out of balance. This protection is not available in single-entry bookkeeping. Therefore, errors carry forward, and you don't know about them.

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