STUDY MATERIAL

COURSE : I B.Com
SEMESTER : II
SUBJECT : FINANCIAL ACCOUNTING
UNIT : III
SUBJECT CODE: 18BCO23C

UNIT – III Single Entry Methods – Net Worth Method – Conversion Method.
Meaning

There is no system of accounts called 'Single Entry System' The term Jin& entry is
vaguely used to refer to any method of maintaining accounts which not conform to strict
principles of double entry.

Single entry does not mean that there is only one entry for each In fact, single entry is a
combination of (a) Double entry for some like cash collected from debtors (b) Single entry
for transactions like cash and (c) No entry for transactions like depreciation.

In pure single entry, only personal accounts are recorded. In simple single entry, personal
accounts and cash account are maintained. In quasi single q, personal accounts, cash account
and some subsidiary books are maintained Thus, single entry refers to crude accounting
methods which do not nominal accounts and most of the real accounts. Business people,
without systematic accounting knowledge, like small traders, medical practitioners other
professionals follow this method.

Definition

According to R.N. Carter, "Single entry cannot be termed as a system, as it is ; not based
on any scientific system, like double entry system. For this purpose, single entry is now-a-
days known as preparation of accounts from incomplete records".

Kohler, in his 'Dictionary for Accountants' defines single entry system "A system of book
keeping in which as a rule only records of cash and personal accounts are maintained. It is
always incomplete double entry, varying circumstances".

Salient Features or characteristics of Single Entry

(i) Absence of Uniformity:- It is not a specific system governed by definite rules of
operation. It is highly flexible according to the capabilities of individuals maintaining the
records.
 (ii) Records Maintained:- Usually personal accounts are fully written cash book is also
maintained. Nominal accounts and most of the real accounts are completely omitted.

(iii) mixing of Transactions Business dealings as well as personal xed while writing the
cash book.

(iv) suitability:- Sole traders, partnership firms and professionals who cannot id book keeper
usually follow this method to write their own accounts. to f0110w double entry system under
the provisions

(v) Dependence on Original Vouchers:- No entries are made for a large number of
transactions. For example, credit purchases and sales have to be ascertained the copies of
invoices. from

(vi) Finalization of Accounts:- Regular final accounts cannot be prepared. profit or loss can
be ascertained in a crude way, which is not reliable.

Disadvantages or limitations of Single Entry System

The following are the defects and limitations of single entry methods.

i. Insufficient Records:- Except personal accounts and cash account, all accounts are left
out. So, the accounts serve very little purpose.

ii. Absence of Trial Balance:- Trail Balance cannot be prepared for any period, Hence
arithmetical accuracy of the accounts cannot be verified.

iii. Difficulty in ascertaining Profit:- Absence of record for expenses and incomes makes it
impossible to ascertain profit in a reliable way.

iv. Difficulty in ascertaining Financial Position:- In the absence of real accounts, balance
sheet cannot be prepared to assess the financial position of the business.

v. Lack of Statistical Data:- Statistical data relating to increase or decrease in sales,

purchases, different items of expenses, profits etc., cannot be obtained.

vi. Encouragement to Fraud:- Fraud, embezzlement etc., by employees be detected.

vii. Rectification of errors is difficult:- There is no cross verification system like Trial
Balance to detect mistakes. So, rectification of errors is rare.

viii. Value of business cannot be ascertained:- It is difficult for the owners to the value of
goodwill of the business in the absence of proper records.

ix. Planning and decision making are difficult:- The owners cannot plan for future
operations and growth, etc., of the business in the absence of reliable information.
x. Difficulty in getting institutional loans:- Commercial banks do not accept incomplete
records as basis for extending credit.

xi. Filing lax returns, Preparing claims etc:- Tax authorities may charge tax in the absence
of reliable records. Filing claims for loss of stock becomes

Ascertainment of Profit
When business records are incomplete, profit or loss can be found any one of the following
two methods.
(l) Net worth Method (Statement of affairs method)
(2) Conversion Method.

Net worth method

Net worth Method is also called Statement of Affairs method because 'Net worth' ascertained
with the help of statement of affairs.

i. Net worth is the owners' share of the assets, after providing for outside liabilities.

ii. Difference between net worth at the beginning of the year and at the end ofthe year
represents profit or loss for the year because owners' worth or share in assets increases
or decreases due to profit or loss respectively.

iii. Before ascertaining the change in net worth which is the profit or loss, adjustment
must be made for any drawings by the owner or additional capital contributed by him.

The following five steps are to be followed for ascertaining profit or loss under net wonh
method.
step (i): Calculating Opening Capital
Opening capital can be found by preparing a statement of affairs at the beginning of the
year. A statement of affairs is just like a balance sheet. Assets on the right hand side and
liabilities are shown on the left hand side of the statement of affairs. The difference between
both the sides represents 'opening capital '
Since full records are not maintained by the business, the assets and liabilities areascertained
as follows:
• Cash can be physically counted.
• Bank balance is obtained from the pass book.
• Stock is recorded through physical stock taking.
• Debtors and creditors are usually available from the list maintained by the business.
• Other assets can be listed out after an approximate valuation by the owners.
• Any other relevant data like outstanding expenses, accrued income should be listed
out from the owners' memory.

Step (ii): Ascertainment of Drawings during the year

This is a difficult task in most of the cases because cash book may show a part of the
withdrawals only. Money may be used for personal purposes out of sale proceeds and the
balance only may be recorded in cash book or deposited in bank. still, the owners' personal
estimate may help in arriving at the rough amount of the drawings.

Step (iii) : Ascertaining Capital introduced during the year

Additional capital provided by the owner during the year may be in cash or in or goods. The
total amount must be recorded, in whatever form it was brought in.

Step (iv): Computing closing capital

Closing capital can be found by preparing a statement the year, in the same way as opening
statement was prepared. However all adjustments relating to depreciation, provision for
doubtful debts made in the closing statement of affairs which were not necessary in the
opening statement.

Step (v): Preparing Statement of Profit

Statement of profit is prepared as follows:
Statement of Profit or Loss for the year

Closing Capital xxxxxx

Add: Drawings xxxxxx

Less: Additional Capital introduced xxxxxx

Less: Opening Capital xxxxxx xxxxxx

Net profit/loss for the year

Distinction between Balance Sheet and Statement of Affairs

Though both of them show assets and liabilities, they differ in the following respects:

i. Basis of preparation: Balance sheet is based on ledger balances but statement of

affairs is prepared from balances, valuations, information from inquiry, etc.

ii. System: Balance sheet is prepared on the basis of double entry statement of affairs is
out of incomplete records.Trial Balance:
iii. Trial balance is prepared before abalance which ensures its arithmetic accuracy.
Statement of foundation like trial balance.

iv. Omission of assets and liabilities: Omission of any assets or liabilities is automatically
found in balance sheet because the debits and credits will not tally.
Statement of affairs cannot reveal any omissions and commissions in assets and
liabilities.

v. Objective and Purpose: Balance sheet reveals the financial position Of a business
accurately.
Statement of affairs shows only estimated financial position.

vi. Capital: Capital is shown in the balance sheet from the capital account the ledger.
the
Capital, in the statement of affairs, is only a balancing figure in statement itself.

2. Conversion. Method
The process of collecting, •computing and recording missing information along with the
available data in the incomplete books of a business is called •conversion method'. Once the
books are 'converted', all future can be recorded as per 'double entry system'.

Need for Conversion: The net worth method does not provide a clear picture operating
results of a business. It does not show sales, purchases, gross fit, operating expenses etc. So it
is not possible to make a meaningful analysis of the financial statements and initiate effective
steps to improve the financial position of the business.
Conversion to double entry system enables a business to avoid the harassment of taxation
authorities and ensures better management of the business. The following are the steps to be
followed for Conversion of incomplete records as per the requirements of Double entry
system.
step 1 : Statement of affairs at the beginning of the year from which conversion is to be
effected should be prepared. The balance in the statement represents opening capital.

In problems, it may not be possible to complete the statement due to missing opening
balances like Debtors, Creditors, Stock. The statement should be prepared to the extent
possible and can be completed at a later stage.

Step 2: Cash book with Cash and Bank columns or a single column should be prepared.
Careful scrutiny of bank pass book and enquiry relating to cash 'takings' used by the owner
for personal expenses and payments are essential.

In problems, opening or closing cash or bank balances may be missing. The balance in the
cash book represents the missing figure. Cash book must be prepared even when the opening
and closing balances of cash and bank are given. Any shortage on the debit side can be cash
sales or additional capital Introduced or sundry income. Shortage on the credit side can be
cash purchases or drawings or sundry expenses,

Step 3: Bills receivables account, bills payables account, total debtors account and total
creditors account must be prepared. Preparation of these accounts can help in finding any
missing items like opening or closing debtors, opening or closing creditors, credit purchases
and sales etc.

Total sales and total purchases can be found by adding cash and credit sales and also cash
and credit purchases.

If opening or closing stock is missing, preparation of memorandum trading account after

ascertaining gross profit ratio can reveal the opening or closing stock whichever is not given.

Step 4: Opening statement of affairs can now be completed, by filling up figure and opening
capital can be ascertained.

Step 5: Appropriate journal entry should be passed in res liabilities included in the opening
statement of affairs. sill

Step 6: Real and nominal accounts must be written from recorded in the cash book, total
debtors account, total creditors account etc. The double effect of every entry must be posted
to the ledger, accounts wherever necessary.
Step 7: All the accounts in the ledger must be balanced balance should be extracted.

Step 8: From the trial balance and any other additional details trading account, profit and loss
account and balance sheet must be prepared

Note: step 5. 6 and 7 are not needed to solve examination problems

The following table shows the figures which are usually missing and the appropriate account
from which they can be found

Total debtors account reveals any one off the items as balancing figure

Total creditors account reveals any one of the items as balancing figure

S.No Missing items

1. . Credit sales
2. Opening debtors Total debtors account reveals any one
3. Closing debtors off the items as balancing figure
4. Cash collected from debtors

5. Credit purchases
6. Opening creditors Total creditors account reveals any one
7. Closing creditors of the items as balancing figure
8. Cash paid to creditors

9. Opening stock Memorandum trading account reveals

10 Closing stock any one them, if gross profit ratio is
known

11. Opening bills receivable

12 Closing bills receivable Bills receivable account can reveals
13. Bills receivable received any one of the items as balancing
14. Bills receivable collected figure.
15. Opening bills payable
16. Closing bills payable Bills payables account can reveals any
17. Bills payable issued one of the items balancing figure
18. Bills payable honoured

19. Opening cash or bank

20. Closing cash or bank
21. Cash sales Cash and bank A/c can reveals any one
of the missing items as balancing
22. Cash purchases
figure
23. Drawings
24 Sundry income

. When opening or closing cash balances and also cash purchases or cash missing, it can be
assured that there are no cash sales or cash purchases some other way is available to find
them.

various required items for the preparation of final accounts should be located information
given in the problem. In this process missing figures can be identified. The following table is
useful in searching for the required information.

(B) Other Exercises

Networth Method Sole Traders

l . Mr. Janaki Raman keeps his books by single entry. He started business on I January 1991
with Rs.1,00,000 On 31 st December 1991 his position was as under.
Assets Rs.
Cash at Bank 5,000
Furniture 12,500
Plant 50,000
Sundry debtors 25,000
Stock 45,000
Bills Receivable 5,000

Liabilities:
Sundry creditors 20,000
Bills payable 2,500
Outstanding creditors 2,5002,500

Ascertain the profit or loss made by Mr. Janaki Raman during 1991.
2. Suresh started business with Rs. 25,000 as capital on 1-1-94. During the year he has
withdrawn at the rate of Rs. 600 per month. He has sold his wife's jewel for Rs. 4,000 and
introduced the same as additional capital to the business. His position on 31-12-94 was as
follows:

Rs. Rs.
Bank 2.000 Cash in hand 500

Stock 20,000 Sundry creditors 6,000

Debtors 1 2, 100 Expenses 400

outstanding
Furniture 500

He keeps his books under single entry method. Determine his profit or loss for the year.

3. Shanna commenced business on 1st January 1990 with a capital of Rs. 20,000. He
immediately bought furniture & fixtures for Rs. 4,000. On 30th June 1990, he borrowed Rs.
10.000 from his wife 9% p.a. (interest not yet paid) and introduced a further capital or his
own amounting to Rs. 3000. Sharma withdrew at the rate of Rs. 600 p.m. at the end o feach
month for household expenses. On 3 1st December 1990, his position was as follows:-

Cash in hand Rs. 5,600; Sundry debtors Rs. 9,600; Stock Rs. 13,600; Bills receivable Rs.
3,200; Sundry creditors Rs. I ,000 and owing for Rent Rs. 300. Furniture and fixtures to be
depreciated by 10%.

Ascertain the profit or loss made by Sharma during 1990.

4. commenced business on -1st January, 1989 with a capital of Rs 20,000. Soon thereafter, he
bought furniture for Rs. 4,000. On 30th June, 1989 he borrowed Rs.10,000 from his brother
at 12% per annum (interest not yet paid) and introduced further capital of his own amounting
Rs. 3,000. He withdrew @Rs. 600 p.m. dt end Of each month for household expenses. On 3
1 st December, 1989 his position was as follows :

Cash in hand Rs. 400; Cash at bank Rs. 5,200; Sundry Debtors Rs. 9,600; Stock Rs. 10,000;
Bills Receivable Rs. 3,200; Sundry creditors Rs. I ,000 and owing for rent Rs. 300.

Furniture and fixtures are to be depreciated by 10%. Ascertain the profit or loss made by 'X'
during 1989.

5, Amitabh keeps his books under single entry system. Assets and liabilities on 31-12-93 and
31-12-94 stood as follows :
 31-12-93 31-12-94

Cash 10 2,000

Bank balance 990 10,000

Stock 7,000 10,000

Sundry Debtors 15,000 20,000

Furniture 3,000 3,000

Sundry creditors 3,000 6,000

He introduced an additional capital of Rs. 3,000 during 1994. He withdrew Rs. 7,000 for his
domestic purpose. Find out the profit for 1994.

6. Ajay keeps his books by single entry method. His position on 31-12-77 and 31-12-78
1977 1978

Cash 250 300

Bank balance 2,750 2,200

Stock 21,000 18,000

Sundry Debtors 7,500 12,000

Furniture 1,750 1,575

Machinery 15,000 25,000

Sundry creditors 18,000 23,000

During the year, Ajay introduced Rs. 5,000 as further capital in the business and withdrew
Rs. 600 p.m.
From the above, prepare a statement showing the profit or loss made by him for the year
ended 31-12-1978.

7. Prakash keeps his books by the 'Single entry method'. His position on 31.12.1987 and
31.12.1988 was as follows:
1987 1988

Cash 200 300

Bank balance 3,000 2,000

Stock 20,000 19,000

Sundry Debtors 8,500 14,000

Furniture 1,800 1,500

Plant 15,000 27,000

Sundry creditors 22,000 29,000

During the year Prakash introduced Rs. 5,000 as further capital and withdrew Rs. 750 per
month.
From the above, prepare a statement showing the profit or loss made by him for the year
ended 31.12.1988.

From the following details, prepare a statement of profit or loss for the year ended mber31,
1989.
1-1-1989 31-12-89

Machinery 15,000 20,000

Furniture 2,000 2,000

Debtors 90,000 70,000

Cash 2,700 4,800

prepaid expenses 500 -

Accrued Income - 800

Outstanding expenses 3,000 5,300

 Provide 10% depreciation on Machinery and furniture and 5% for bad debts on
sundry debtors. Interest on capital to be provided at 6% per annum. After 3 months from the
beginning of the year the proprietor had to bring in Rs. 5,000 by way of additional capital.
He drew salary at Rs. 500 p.m. In addition, he drew Rs. 3,000 in anticipation of profits, Rs.
2,000 income-tax was paid.

9, Shri. Sankaran keeps his books on single entry and the following infomation is disclosed
from his records:
1-1-1989 31-12-89
Balance at bank 4,200(Cr) 11,200

Stock 30,000 40,000

Debtors 60,000 57,000

Furniture 10,000 10,000

Investment 10,000 10,000

Cash 200 800

Sundry creditors 50,000 54,000

Bills payable 20,000 1,000

Loans from Mr.A - 6,000

Shri Sankanran transferred Rs. 500 each month during the first half year and Rs• 400 each
month for the remaining period from the business to his private banking account by way of
drawings. In addition, he withdrew Rs. 10,000 for his daughter's marriage and Rs. 2,000 for
charitable purposes. He also withdrew goods worth Rs. 2,000 for domestic purposes.
In September 1991, he had received a lottery prize of Rs. 10,000 of w invested into the
business Rs. 8,000. He sold his private car for Rs. 7,000 and the proceeds were utilised for
business.
He wants his furniture to be depreciated at p.a. and a reserve for doubtful debts be created at
5%.
He had not paid two months' salary to his clerk at the rate ofRs. 300 p.m. and months' rent
of shop was outstanding amounting to Rs. 400. Commission earned but not received by him
was Rs. 4,800.

Prepare a statement of profit or loss for the year ending 31.12.91

10. Lokesh is a cloth merchant, who has not kept full double entry records. His position on 1-
1-92 and 31-12-92 was as follows :
1-1-92 31-12-92

Cash 1,520 940

Bank balance 13,900 11,860 (as per bank

pass book)
Stock 25,200 33,400

Sundry Debtors 9,000 12,640

Furniture 4,000 4,000

Sundry creditors 8,620 10,600

Mobike - 8,000

During the year he had withdrawn Rs. 800 per month for his personal expenses and
purchased a new mobike for his business use for Rs. 8,000. A cheque for Rs. 2,000 issued on
29.12.92 was presented for payment on 12-1-93.

Prepare a statement, showing profit for 1992 after (a) providing 10% depreciation m
fin•niture and 20% depreciation on mobike. (b) witting off Rs. 640 as actual bad debts and
(c) making a 5% provision for doubtful debts.

11.. A trader has not kept proper books of accounts. The following balances are placed
before you and you are required to prepare a statement of gross profit and net profit for the
year ended 31st March 1971, and a statement of affairs as at that date.

1-4-1970 31-3-70
Cash in hand 5,350 5,400

Bank overdraft 45,000 40,000

Stock 59,350 62,200

Sundry creditors 38,600 37,200

Sundry Debtors 30,200 29,800

Bills receivable 42,400 40,800

Land and building 53,000 53,000

Furniture 4,600 4,600

Bills payable 62,000 58,000

Drawings during the year amounted to s.6,000. Depreciation is to be calculated on land and
building at 2 % and on furniture and fitting at 10%. Provide for doubtful debts at 21/2%.

12. Rangan has kept his books under single entry system. His position as on 31-3-94 and 31
3-95 was as follows:
Cash 1,000 1,500

Bank balance 15,000 10,000

Stock 1,00,000 70,000

Sundry Debtors 42,500 85,000

Furniture 10,000 10,000

Machinery 75,000 75,000

Sundry creditors 1,25,000 1,45,000

During the year 1994-95, he introduced Rs. 25,000 as additional capital and withdrew Rs.
5,000 per month. Depreciate furniture by' 5% and machinery by 10% per year. Ascertain
profit for the year ended 3 1-3-95 and prepare a balance sheet as on that date.

Conversion Method
13. From the information given below, calculate sales •

Rs. Rs.
Opening debtors 5,000 Opening debtors 2,000

Closing debtors 8,000 Closing debtors 1,000

Cash received from debtors 10,000

(including cash from bills
 receivable Rs.20,00)

14. From the following facts you are required to calculate total purchases

Rs.
Bills payable on 1st January 5,000

Creditors 1st January 6,000

Bills payable 31st December 7,000

Creditors 31 st December 4,000

Cash paid to creditors during the year 30,200

Bills payable discharged during the year 8,900

Returns outwards 1,200

Cash purchases 25,800

18. From the following particulars, prepare Bills receivable account and Total Debtors
Account for the year ended 31-12-1992 :
Debtors on 1-1-1992 36,000

Bills Receivable on 1-1-1992 10,000

Sales (including cash sales Rs. 20,000) made during the -

year
3,00,000
Cash received from debtors
2,00,000
Bills Receivable on 31-12-1992
15,000
Retums inwards
15,000
Discount allowed to Debtors
10,000
Bad Debts written off
3,000
Bills receivable endorsed to creditors
 10,000
Cash received on bills matured
15,000

20. Murugan keeps his books under single entry system. On 1-1-82 his capital was Rs.
69,000. An analysis of his cash book for the year gives the following particulars:

Debit Side Amount Credit Side Amount

Amount 60,000 Due to Bank (1-1-82) 7,400

Received from debtors Paid on 5,000 Payment to creditors 25,000

Capital A/c
General expenses 10,000

Wages 15,500

Drawings 3,000

Balance at bank 4,000

Balance on hand 100

65,000 65,000

The following were his assets and liabilities

1-1-82 31-12-82

Sundry Debtors 53,.000 88,000

Sundry creditors 15,000 19,500

Stock 17,000 19,000

Plant 20,000 20,000

Furniture 1,400 1,400

From the above particulars prepare Trading and P&L a/c and balance sheet on 31-1282 after
providing interest on capital at 5% depreciation on furniture at 5%, depreciation on plant at
10% and a reserve of 5% on debtors.

23. The books of Mr. 'X' showed the following position on 1-1-89.
Liabilities Rs. Assets Rs.

Capital 8,303 Goodwill 1,854

Creditors 901 Furniture 1,401

Debtors 4,683

Cash at Bank 1,266

9,204 9,204

Cash transactions reveal the following :

Receipts from customers — Rs. 21 ,246 — Rs. 8, 160

Payment of Salaries — Rse 1,830

Payment of Creditors — Rs. 9,036

Payment of Rent — Rs. 945

Sundry Expenses — Rs 384

On 31-12-89 Stock amounted to — Rs. 3,200

Debtors - Rs. 5,670

Creditors — Rs 1,600

Prepare Trading & Profit and Loss a/c for year ended 31-12-89.

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