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Lecture No.03 B.Com

Financial Accounting
Instructor: Mr. Muhammad
Naeem

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 Lecture Contents
• Incomplete Record

• Single Entry System

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 Single Entry System
• A single entry system records each accounting transaction with
a single entry to the accounting records, rather than the more
common double entry system.
• The core information tracked in a single entry system is cash
disbursements and cash receipts.
• The primary form of record keeping in a single entry system is
the cash book, which is essentially an expanded form of a
check register, with columns in which to record the particular
sources and uses of cash, and room at the top and bottom of
each page in which to show beginning and ending balances.

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 Types of Single Entry System
• There are three types of Single Entry Systems.

i. Pure Single Entry System (Personal Accounts)

ii. Simple Single Entry System (Personal and Cash Accounts)

iii. Quasi Single Entry System (Personal, Cash and Subsidiary

books)

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 Advantages of Single Entry
System
• The main advantage of a single entry system is its absolute
simplicity.

• It requires a minimal number of entries, and a low knowledge

of accounting standards.

• This makes it easy for a non-accountant to use.

• In addition, it can be used to derive the profits generated by a

business in short order.

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 Disadvantages of Single Entry
System
• Assets. Assets are not tracked, so it is easier for them to be lost or stolen.
• Audited financial statements. It is impossible to obtain an audit opinion on
the financial results of a business using a single entry system; the
information must be converted to a double entry format for an audit to even
be a possibility.
• Errors. It is much easier to make clerical errors in a single entry system, as
opposed to the double entry system, where the debit and credit totals for
separate entries to different accounts must match.
• Liabilities. Liabilities are not tracked, so you need a separate system for
determining when they are due for payment, and in what amounts.
• Reporting. There is much less information available upon which to
construct the financial position of a business, so management may not be
fully aware of the performance of the firm.

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Profit Calculation in Single Entry
System
Two methods are used to calculate Profit and Loss.

i.Net worth method

ii.Conversion method

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 Net worth method
Net worth method is also called the statement of affairs method or capital comparison
method. According to this method, profit or loss of the business is determined by
making a comparison between the capitals of two dates of a period.
•If there are other capital related items such as drawing, additional capital, interest on
capital etc. are to be adjusted to ascertain the amount of profit or loss. These items
include:
•Drawing
If the drawing is made during the year, it should be added to the amount of closing
capital.
•Additional capital
If additional capital is introduced in the business during the year, it should be deducted
from the amount of closing capital.
•Interest on capital
If the interest is provided on capital, it should be deducted from the amount of closing
capital.
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 Net worth method
Name of Firm
Statement of Profit & Loss
For the Years Ended on 31st Dec, 20XX
Ending Capital XXXXX
Add: Drawing XX
-----------
XXXXX
Less: Opening Capital XXXX
Less: Additional Capital XXXX
-----------
Net Profit/Loss XXXXX

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 Net worth method (Statement of
Affairs)
● When capital is not provided then we prepare statement of affairs to
calculate Capital.
● This Statement is like as balance sheet.

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 Net worth method (Statement of
Affairs)
● Questions: Radheshyam a retail trader had no proper methods accounting
but the following but the following information is made available to you,
you are required to prepare opening and closing statement of Affairs and
Statement showing Profit or Loss for the year ended 31stMarch, 2007 after
taking into consideration the adjustments.

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 Net worth method (Statement of
Affairs)
Adjustments:
(1) On 1st October, 2006 Mr. Radheshyam had withdrawn `.25,000 for
personal use out of which he invested `. 5,000 at par on the same day in 10%
Municipal Bonds which is treated as business assets.
(2) He had also withdrawn `. 15,000 for his daughter’s marriage.
(3) Depreciate Furniture by 10% p.a. and write off `.1,000 from motor van.
(4) As regards debtors `.1,000 is irrecoverable and further reserve of 5% is
to be made on debtors.
(5) Allow interest on Capital at 10% p.a.
(6) Charge interest on Drawing `. 1,000.

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 Lecture Summary
• Incomplete Record

• Single Entry System

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THANK YOU -
QUESTIONS?