Financial Accounting One BSAF1209

Lecture notes

Chapter One

Incomplete records 8hrs

 Double and single entry systems of book keeping and their merits and
demerits

 Mechanisms of converting incomplete records into complete records, and

to prepare Trial balance and the financial statements thereafter

Lecture Notes:
What is a 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
single entry system is centered on the results of a business that are reported in
the income statement. The core information tracked in a single entry system is
cash disbursements and cash receipts. Asset and liability records are usually
not tracked in a single entry system; these items must be tracked separately.
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. An
example of a cash book is:

No. Date Description/Details Revenue Expense Inventory Payroll

Balance forward $41,000 $23,000 $5,700 $8,500

1000 6/15 Utilities 400

1001 6/18 Merchandise 12,300

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1002 6/20 Wages 4,500

6/21 Bank deposit 13,100

1003 6/22 Supplies 1,200

Ending Balance $54,100 $24,600 $18,000 $13,000

Disadvantages of a Single Entry System

The most significant problems associated with a single entry system include:

 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.

Single entry systems are strictly used for manual accounting systems, since all
computerized systems utilize the double entry system instead.

It is generally possible for a trained accountant to reconstruct a double entry-

based set of accounts from single entry accounting records, though the time
required may be substantial. By doing so, you can then reconstruct the balance
sheet and statement of cash flows.

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Double Entry Bookkeeping System

Learning Outcomes

 Describe the double entry bookkeeping system

Double-Entry Bookkeeping

Double-entry bookkeeping, in accounting, is a system of bookkeeping so named

because every entry to an account requires a corresponding and opposite entry
to a different account. The double entry has two equal and corresponding sides
known as debit and credit. The left-hand side is debit and right-hand side is
credit. For instance, recording a sale of $100 might require two entries: a debit
of $100 to an account named “Cash” and a credit of $100 to an account named
“Revenue.”

Debits and Credits, Left and Right

You may hear accountants talk in terms of debits and credits. Debit literally
means left, and credit means right. Accountants use a two-column journal to
record transactions, so the above bonus would be recorded like this in 2017:

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Account Debit Credit

Bonus (expense) 5,000

Accrued Bonus (liability) 5,000

In this entry, the bonus is recognized before the cash payment to the salesperson
actually occurs, along with a liability in the same amount. In the following
month, when the company pays the bonus, it would record the following entry:

Account Debit Credit

Accrued Bonus (liability) 5,000

Checking Account (asset) 5,000

The cash balance declines as a result of paying the commission, which also
eliminates the liability. The reason your debit card is called a debit card is
because the bank shows your balance as a liability because they owe your money
to you—in essence, they are just holding it for you. A liability usually has a credit
balance (balance on the right side of the ledger) and so when you spend money
and they pay it out on your account, they debit your account (a debit offsets a
credit.) The figure below illustrates how debits and credit affect various types of
accounts.

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The Accounting Cycle

The accounting cycle begins with transactions and ends with

completed financial statements. The first step is to journalize
the transaction. The journal is a chronological list of each
accounting transaction and includes at a minimum the date,
the accounts affected, and the amounts to be debited and
credited.

Periodically, depending on the business, journal entries are

posted to the general ledger. The general ledger is the exact
same information as the journal, but sorted by account.

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Once all journal entries are posted, the ledger balances are posted to a trial
balance, which is a list of all the accounts and balances, checking to see that the
total of the debit column is equal to the total of the credit column. Each account
is then checked for accuracy and adjusted, if need be, before the financial
statements are run. This process is referred to as the “Accounting Cycle.”

There are no debits or credits on the financial statements—they are

informational reports, not data, so they are built with the user in mind

Summary

The double-entry bookkeeping system is summarized below:

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  Assets. Items of financial value that the business controls (“owns”) for the
purpose of producing income for the owners.
 Liabilities. Monies that the business owes to non-owners.
 Owners Equity. The theoretical value of the business that would be
distributed to the owners after the assets were sold and the liabilities paid.
 Revenue. Payments made to the business by customers for the goods
and/or services provided by the business.
 Expenses. Costs incurred by the business in providing the goods and/or
services purchased by the customers.

How is double-entry bookkeeping better than single-entry?

The double-entry system has several advantages over the single-entry system:

1. Recording method: Single-entry bookkeeping gives a one-sided picture of

transactions recorded in the cash register. In double entry, changes due
to one transaction are reflected in at least two accounts. The double-entry
system is preferred by investors, banks and buyers because it gives them
a more complete financial picture of an organization.
2. Error detection: In double entry, debits and credits must always be the
same. If that is not the case, then there is an error. This makes it easy to
spot errors and ensure that they are not carried forward to other journals
and financial statements. In single entry, there is no method for error
correction or detection.
3. Company size: The single-entry system is only appropriate for small
enterprises, whereas the double-entry system can be used by all sizes of
businesses, including large ones.
4. Preparation of financial statements: The information recorded in a
single-entry system isn’t adequate for financial reporting or preparing
profit and loss statements. Bigger organizations rely on these reports to

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 track their performance, so they need the extra information captured by
double-entry accounting.

Difference between single-entry and double-entry system of bookkeeping

If you don’t use the single-entry method, record transactions with double-entry
bookkeeping. The double-entry method is more complicated than single-entry,
and it is the basis of accrual accounting.

With double-entry bookkeeping, you record two entries for every business
transaction. Each entry is either a debit or credit. The entries are equal but
opposite. Your debit and credit entries must be the same values.

Some accounts are increased by debits and others decreased by credits. Other
accounts are increased by credits and others decreased by debits. The following
chart shows how each account is affected by debits and credits:

Though double-entry is more difficult than the single-entry system of

bookkeeping, the method offers benefits to small business owners. It reduces the
chance of making an error because you must balance the entries. Some
businesses are required to use double-entry bookkeeping.

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Who uses single-entry bookkeeping?

Single-entry bookkeeping is the simplest way to organize your accounting

records. But, the method is not the best fit for some businesses. Think about
your business’s size, industry, and specific needs before choosing a method.

Consider the single-entry method if you:

 Make less than Ugx 5 million in annual gross sales or have less than Ugx1
million in gross receipts for inventory sales, according to the IFRS
 Are a small business that operates as a sole proprietorship or partnership.
 Collect customer payments at the point of sale

Consider the double-entry method if you:

 Make more than Ugx 5 million in annual gross sales or have more than
Ugx 1 million in gross receipts for inventory sales
 Operate as a corporation or a partnership with a Corp partner
 Send invoices or let customers buy on credit
 Have much inventory

Single-entry bookkeeping is great for new businesses. Companies with a low

number of transactions and uncomplicated financial tracking needs also benefit
from single-entry. And, using the single-entry method is a good way to start
learning how to manage your books.

Keep in mind that assets and liabilities are harder to track with single-entry
bookkeeping. It’s also easier to make common accounting errors because there
is no matching system, like with double-entry. Single-entry bookkeeping shows
less information about your business’s financial health.

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