Accounting might be familiar to you, especially if you have been a commerce student. Though the accounting system is a define system of record that a company needs to record and manage its financial transactions majorly, including its income and expenses. It is regulated by a set of accounting guidelines and procedures that helps to generate correct financial documents that are ready for reference for internal and external stakeholders to make effective investment decisions. The accounting system is broadly divided into two categories- single entry vs. double entry. This writing will discuss the single-entry system’s meaning, features, and advantages.
What is a single-entry system of bookkeeping?
This system maintains the entries related to tax paid, accounts payable cash, receivables, and other bills. Small businesses prefer single-entry bookkeeping because it is easy to maintain and has minimum requirements.
Know more about digital payments for accounting.
Who Uses a Single Entry System?
- Have no or very few employees (because a more detailed bookkeeping system would be impossible or too cost excessive to implement.)
- The company uses "cash basis accounting" instead of "accrual accounting" (as accrual accounting records when a transaction occurs, not when the cash is exchanged).
- The company has few financial transactions (let's say a firm can have only half a dozen transactions in a given day due to its nature).
- Companies who do not sell on credit or installment plans (means amounts are paid in total).
Features of Single Entry System Of Accounting:
Mentioned below are the features of single entry system-
Original vouchers
Under this system, the original vouchers play an essential role because they help collect information such as amount, transaction date, discount, and so on.
Cash book
Personal Account
A single-entry accounting system maintains the personal accounts for all the debtors and creditors to conclude the number of sales and purchases in a given period. However, the personal statements are recorded, whereas the real and nominal accounts are ignored.
No fixed rules
Evaluation of profit or loss
The profit and loss of the business are determined from the information available. Thus, the profits or losses are not defined. The profits or losses are only estimates. Therefore, the final position as a whole of the business cannot be determined.
Final accounts
Preparing the final accounts in the single-entry accounting system is challenging as accurate, and nominal account information needs to be mentioned. The figures for liabilities and assets are calculated from the available data, but they are only estimates. Hence, a statement of Affairs is created rather than a Balance Sheet.
Pros and Cons Of Single Entry System
Pros of single entry system
Simple and convenient-
As discussed above, the single-entry bookkeeping system is easy to maintain and understand. It does not have predetermined principles and rules while recording financial transactions. As the system is single, anyone can keep it as it does not require additional accounting knowledge.
Economical-
The single-entry accounting system is considered an economic system of recording and maintaining financial transactions. It also only needs a few record-keeping books for business as there are limited financial transactions. Professionals or experienced personnel are not required to be hired to register the business’s financial transactions.Easy to calculate profit-
Under the single-entry system, the amount of profit can be calculated easily. Because it depends on the income statement, it is easier to find out the profit and loss of the business.
Cons of single entry system
Unscientific and unsystematic-
The single-entry system is an unscientific system of recording and maintaining financial transactions because it does not follow a specific rule for recording financial transactions.
Incomplete system-
The single-entry system is considered an incomplete bookkeeping system as it does not record two aspects of the financial transactions as a business. It records only a cash account and does not record transactions related to natural and nominal charges. Hence, it records only one aspect of all financial transactions; it needs to present the full information necessary for business management.
Poor arithmetical accuracy-
As the single-entry system is not based on the principles of debit and credit, it lacks to provide arithmetical accuracy. Under the plan, a trial balance cannot be created to check the accuracy of the books of accounts. Due to the absence of arithmetic accuracy, there are chances of committing manipulation, error, and fraud compared to the double-entry accounting system.
Does not reveal actual financial position-
The accurate total of profit or loss cannot be determined under the single-entry system because it needs to maintain a nominal account. Moreover, the system does not support and record actual performances except cash books. Therefore, it cannot reveal the proper financial position of a business. In addition, the balance sheet cannot be prepared because the existing accounts need to be maintained. Hence, at the end of the accounting year, the accurate financial position of the business cannot be determined.
Unacceptable for tax purposes-
The single-entry system has inaccurate and incomplete records of the financial transactions of a business. Hence, the tax authorities do not accept such accounts for tax assessment.
Final Thoughts:
A single-entry system of bookkeeping is easy to maintain and understand. Still, at the same time, it will not be helpful in situations where the company has to show a final profit position. Moreover, stakeholders and investors will not be able to make future investment decisions based on a single-entry system. In the above blog, we have discussed the introduction, features, and advantages and disadvantages of the single-entry system of bookkeeping.