Discuss the drawbacks of single entry system of accounting. Briefly explain the two methods of ascertaining profit when accounting records are incomplete.

 Following are the drawbacks of single entry system:

1. No checking of Arithmetical Accuracy: Arithmetical accuracy of the accounts can not be checked because no agreed trial balance can be prepared.

2. No True Financial Performance: True financial performance can not be ascertained because trading and Profit & Loss Account cannot be prepared.

3. No True Financial Position: True financial position cannot be ascertained because Balance Sheet cannot be prepared.

4. No Recognition under Laws: such records are not recognised by the Courts, Sales Tax and Income Tax Authorities.

5. It is difficult to conduct the audit of such records.

6. It is difficult to operate internal control system.

7. It is difficult to operate internal check system.

8. It is difficult to exercise control over assets.

9. It is difficult to detect fraud.

Net Worth Method

Under this method profits are calculated by comparing the net worth at the beginning of the accounting period with the net worth at the end of the accounting period. This method does not involve the preparation of trading and profit and loss account. It is considered most suitable when the information available is too limited. 

Computation of Net Worth

Net worth is the value of all of your assets, minus the total of all of your liabilities. Put another way, it is what you own minus what you owe. If you owe more than you own, you have a negative net worth. If you own more than you owe you will have a positive net worth. This calculator helps you determine your net worth. It also estimates how your net worth could grow over years. 

Conversion Method: There are two ways of preparing the final accounts i.e., by converting single entry records in to complete double entry records including preparation of Trial Balance or by preparation of final accounts simply by ascertaining certain missing items. The former method is called Full Conversion Method and the latter is called Abridged Conversion Method.

Conversion methods are of two types:

1. Full Conversion Method: Preparation of final accounts after converting the single entry records after converting the single entry records into complete double entry records including the preparation of Trail balance. Prepare the statement of affairs at the beginning and open all those real and personal accounts which do not appear in the ledger maintained under single entry system. This may involve the opening of all real accounts (other than cash and bank) and the personal accounts such as capital, drawings, loan outstanding expenses, outstanding incomes, prepaid expenses etc. It can be done by passing an opening journal entry. From the cash book, complete postings into all real and personal accounts opened above. Go through the debit side of the cash book and open all the incomes accounts in the ledger and make postings therein. Go through the credit side of the cash book and open all the expenses accounts in the ledger and make postings therein. Make complete analysis of the customer’s accounts and complete double entry in accounts like sales, sales return, bad debts, bills receivable etc. Make complete analysis of the supplier’s accounts and complete double entry in accounts of purchases, purchase returns, bad debts, bills payable etc. Go through all vouchers and documents and note whether certain other items require entry in books.  

e.g. Old furniture sold which may involve some profit or loss. Prepare a trail and balance and ensure that double entry is complete in every respect. Then Profit and loss Account and Balance sheet can be prepared.

2. Abridged Conversion Method: In this conversion method a summary of all cash transactions are prepared for the entire period. This is known as receipt and payments account’. In this account the opening cash and bank balances and enter all receipts during the year under various head of accounts and the closing balances of cash and bank are shown on its credit side. This enables us to identify the amounts of various incomes earned and expenses incurred. Total debtors and total creditors account to find out the amounts of credit sales and credit purchases respectively. This enables us to work out most of the figures required for preparing the final accounts. 

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