Chapter: Accounts from Incomplete Records (Single Entry System)

Introduction
 Chapter Name: Accounts from Incomplete Records, also known as Single Entry System.
 Importance:
o Significant chapter for CA students.
o Weightage: Up to 10-15 marks in exams.
 Purpose:
o To understand how to handle accounting for businesses that do not follow the Double Entry
System.
o Useful for small businesses or those with limited accounting knowledge.
Double Entry vs. Single Entry System
 Double Entry System:
o Records every transaction with two aspects: Debit and Credit.
o Used by most businesses for complete and accurate record-keeping.
o Example: Cash Account Debit to Sales (for a sale transaction).
 Single Entry System:
o Incomplete records; not all transactions are recorded with both aspects.
o Common among small businesses (e.g., a local vendor like "Raju Panwadi").
o Records limited details like cash received, cash paid, or amounts owed.
Why Single Entry System Exists
 Small Businesses:
o Owners (e.g., Raju Panwadi) may lack accounting knowledge.
o They record only basic details (e.g., cash in/out, debtors).
 Examples:
o A vendor might note: "Sold goods, received cash," or "Gave credit to a customer."
o Personal experience: Initially recorded only fees received (e.g., 5 students, 5000 total), not full
double-entry.
Objective of the Chapter
 Practical Application:
o Prepares students to work with businesses using incomplete records.
o Learn to derive financial information (e.g., profit) from limited data.
 Key Tasks:
1. Calculation of Profit: Determine profit from incomplete records.
2. Preparation of Final Accounts: Create complete financial statements (covered later).

Single Entry System: Key Points

1. Definition:
o A system where not all transactions are recorded using the Double Entry method.
o Also called "Accounts from Incomplete Records" due to missing or partial data.
2. Adoption:
o Generally adopted by very small sole proprietorship firms.
3. Limitation:
o Does not maintain the Double Entry Bookkeeping System.
Types of Single Entry System
 Three Types:
1. Pure Single Entry:
 Only personal accounts are maintained (e.g., debtors/creditors like Ramu, Shamu).
 Example: Records who owes money or is owed money, nothing else.
2. Simple Single Entry:
 Personal accounts + Cash Book are maintained.
 Example: Tracks cash inflows/outflows along with debtors/creditors.
3. Quasi Single Entry:
 Personal accounts, Cash Book, and Subsidiary Books are maintained.
 Example: Includes purchase book, sales book, etc., but still incomplete.
Explanation of Types
 Pure Single Entry:
o Only personal accounts (e.g., Ramu owes 500, Shamu paid 200).
o No record of cash or other assets.
 Simple Single Entry:
o Adds Cash Book to track cash transactions (e.g., cash received, paid).
 Quasi Single Entry:
o More detailed; includes subsidiary books (e.g., sales, purchases) but still not fully double-entry.

Calculation of Profit
Basic Concept
 Formula:
o Profit = Closing Capital + Drawings - Additional Capital - Opening Capital
 Steps:
1. Determine Opening Capital (start of the year).
2. Add Additional Capital (invested during the year).
3. Subtract Drawings (withdrawn for personal use).
4. Compare with Closing Capital (end of the year) to find profit.
Example (Raju Panwadi)
 Given:
o Opening Capital: ₹1,00,000
o Additional Capital: ₹20,000
o Drawings: ₹30,000
o Closing Capital: ₹1,15,000
 Calculation:
o Step 1: ₹1,00,000 (Opening) + ₹20,000 (Additional) = ₹1,20,000
o Step 2: ₹1,20,000 - ₹30,000 (Drawings) = ₹90,000
o Step 3: ₹1,15,000 (Closing) - ₹90,000 = ₹25,000 (Profit)
 Conclusion: Raju earned a profit of ₹25,000.
Statement Format
 Statement of Profit:
o Closing Capital: ₹XXX
o Add: Drawings: ₹XXX
o Less: Additional Capital: ₹XXX
o Less: Opening Capital: ₹XXX
o Profit: ₹XXX

Handling Missing Capital

 Scenario: If Opening or Closing Capital is unknown.
 Solution: Use a Statement of Affairs to calculate missing capital.
 Statement of Affairs:
o A snapshot of assets and liabilities to derive capital (Assets - Liabilities = Capital).
o Not a Balance Sheet (specific to Double Entry); called "Statement of Affairs" in Single Entry.
Process
1. Collect Data: Ask for assets (e.g., cash, stock, machinery) and liabilities (e.g., loans, creditors).
2. Calculate Capital: Total Assets - Total Liabilities = Capital.
3. Use in Profit Formula: Plug the derived capital into the profit calculation.
Example (Raju Panwadi - Missing Opening Capital)
 Assets (1st April):
o Machinery: ₹10,000
o Stock: ₹6,000
o Debtors: ₹14,000
o Cash: ₹5,000
 Liabilities:
o Creditors: ₹25,000
 Calculation:
o Total Assets: ₹10,000 + ₹6,000 + ₹14,000 + ₹5,000 = ₹35,000
 o Total Liabilities: ₹25,000
o Opening Capital: ₹35,000 - ₹25,000 = ₹10,000

Difference Between Statement of Affairs and Balance Sheet

Basis Statement of Affairs Balance Sheet
Based on transactions recorded strictly under Double
Source Mostly based on estimates and assumptions.
Entry System.
Capital is a balancing figure (Assets - Capital is derived from the Capital Account in the
Capital
Liabilities). ledger.
Probability of certain omissions (e.g., No possibility of omission; everything recorded step-
Omission
forgotten items). by-step.
Valuation done arbitrarily (no scientific Valuation based on scientific methods (e.g., SLM,
Valuation
method). WDV).
Objective To identify capital. To identify financial position (P&L, Balance Sheet).

Illustrations (Practice Questions)

Illustration 1: Simple Profit Calculation
 Given:
o Opening Capital: ₹10,000
o Closing Capital: ₹12,500
o Drawings: ₹3,000
o Additional Capital: ₹3,750
 Statement of Profit:
o Closing Capital: ₹12,500
o Add: Drawings: ₹3,000
o Less: Additional Capital: ₹3,750
o Less: Opening Capital: ₹10,000
o Profit: ₹1,750
 Conclusion: Raju’s profit is ₹1,750.
Illustration 2: Missing Closing Capital
 Given:
o Opening Capital: ₹1,00,000
o Drawings: ₹24,000
o Assets (31st March 2022): Cash ₹3,200, Inventory ₹34,800, Debtors ₹12,000, Machinery
₹85,000
o Liabilities: Creditors ₹12,000, Bank Loan ₹10,000
 Statement of Affairs (31st March 2022):
o Assets: ₹3,200 + ₹34,800 + ₹12,000 + ₹85,000 = ₹1,35,000
o Liabilities: ₹12,000 + ₹10,000 = ₹22,000
o Closing Capital: ₹1,35,000 - ₹22,000 = ₹1,13,000
 Statement of Profit:
o Closing Capital: ₹1,13,000
o Add: Drawings: ₹24,000
o Less: Opening Capital: ₹1,00,000
o Profit: ₹37,000
Illustration 3 & 4: Both Capitals Missing + Depreciation
 Given:
o Opening (31st March 2021): Building ₹1,00,000 (Dep. 2.5% = ₹97,500 closing), Furniture
₹50,000 (Dep. 10% = ₹45,000 closing), Inventory ₹50,000, Debtors ₹40,000, Bank ₹70,000,
Cash ₹1,200, Loan ₹1,00,000, Creditors ₹40,000
o Closing (31st March 2022): Inventory ₹1,70,000, Debtors ₹90,000, Bank ₹85,000, Cash ₹3,200,
Loan ₹80,000, Creditors ₹70,000
o Additional Capital: ₹40,000 (Insurance matured), Drawings: ₹24,000
  Statement of Affairs:
o Opening: Assets ₹3,11,200 - Liabilities ₹1,40,000 = ₹1,71,200
o Closing: Assets ₹4,90,700 - Liabilities ₹1,50,000 = ₹3,40,700
 Statement of Profit:
o Closing Capital: ₹3,40,700
o Add: Drawings: ₹24,000
o Less: Additional Capital: ₹40,000
o Less: Opening Capital: ₹1,71,200
o Profit: ₹1,53,500
Illustration 5: Income Suppression (Tax Case)
 Given:
o Opening (1st April 2020): Cash ₹25,500, Inventory ₹56,000, Debtors ₹41,500, Land ₹2,00,000,
Jewelry ₹75,000, Loan (Brother) ₹40,000, Creditors ₹35,000
o Closing (1st April 2022): Cash ₹16,000, Inventory ₹91,500, Debtors ₹52,500, Land ₹2,00,000,
Jewelry ₹1,25,000, Motor ₹1,25,000, Loan to Brother ₹20,000, Creditors ₹55,000
o Drawings: ₹96,000 (₹4,000/month × 24), Declared Income: ₹2,28,000 (₹1,05,000 + ₹1,23,000)
 Statement of Affairs:
o Opening: Assets ₹3,98,000 - Liabilities ₹75,000 = ₹3,23,000
o Closing: Assets ₹6,30,000 - Liabilities ₹55,000 = ₹5,75,000
 Income Calculation:
o Closing Capital: ₹5,75,000
o Add: Drawings: ₹96,000
o Less: Opening Capital: ₹3,23,000
o Actual Income: ₹3,48,000
o Declared Income: ₹2,28,000
o Suppressed Income: ₹1,20,000
 Conclusion: Income Tax Officer’s contention is correct; Shri Moti suppressed ₹1,20,000 of income.