Concept Of Statement Of Affairs And Its Preparation

Statement of affairs is a statement of capital, liabilities and assets. Statement of affairs is prepared under the single entry system in order to find out the amount of opening or closing capital of the business. For the purpose of determining the amount of opening capital, the statement of affairs is prepared on the opening date. The statement of affairs is prepared on the closing date for the purpose of determining the amount of closing capital. It is also known as the balance sheet of single entry system.

Preparation Of Statement Of Affairs
Statement of affairs is prepared like the balance sheet. All the liabilities are shown on left-hand side and all the assets are shown on right-hand side. The difference between the total assets and total liabilities is considered as the amount of capital.
Capital = Total Assets - Total Liabilities

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Calculation Of Profit Or Loss Under Single Entry System

The following method is used for the calculation of profit or loss under single entry system.

Net Worth Method
Net worth method is also called statement of affairs method or capital comparison method. According to this method profit or loss of the business is determined by making comparison between the capital of two dates of a period. For example,
Capital as on 1st January 2009 = $ 150000
Capital as on 31st December 2009 = $ 200000
Profit for the year 2009 = Closing capital -Opening capital = $200000-$150000 = $50000.

If there are other capital related items such as drawing, additional capital, interest on capital etc. are to be adjusted to ascertain the amount of profit or loss.
These items include:

* Drawing: If the drawing is made during the year, it should be added to the amount of closing capital.
* Additional capital: If additional capital is introduced in the business during the year, it should be deducted from the amount of closing capital.
* Interest on capital: If the interest is provided on capital, it should be deducted from the amount of closing capital.

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Differences Between Single Entry And Double Entry System

The following are the differences between single entry and double entry system:

1. Meaning
Single entry system is an incomplete system of recording financial transactions. Double entry system is a complete system of recording and reporting financial transactions.

2. Duality
Single entry system is not based on the concept of duality. Double entry system is based on the concept of duality.

3. Accounts
Single entry system maintains only personal accounts of debtors and creditors and cash book. Double entry system all personal, real and nominal accounts.

4. Trial Balance
Single entry system can not prepare a trial balance and hence, arithmetical accuracy of books of accounts can not be checked. Double entry system prepares trial balance and hence, arithmetical accuracy of the books of accounts can be checked.

5. Profit Or Loss
Single entry system can not ascertain the true amount of profit or loss of the business as it does not maintain nominal accounts. Double entry system ascertains true profit or loss of the business as it maintains all nominal accounts.

6. Financial Position
Single entry system can not ascertain the true financial position of the business because it does not maintain real accounts except cash book. Double entry system ascertains financial position of the business as it maintains all personal and real accounts.

7. Suitability
Single entry system is suitable to a small business where only limited number of transactions are performed. Double entry system is suitable for a large business.

8. Tax Purpose
Single entry system is not acceptable for the purpose of assessment of tax. Double entry system is acceptable for the purpose of assessment of tax.

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Disadvantages Of Single Entry System

The following are the notable disadvantages of single entry system:

1.Unscientific And Unsystematic
The single entry system is unsystematic and unscientific system of recording financial transactions. It does not have any set of fixed rules and principles for recording and reporting the financial transactions.

2. Incomplete System
Single entry system is incomplete system because it does not record the two aspects or accounts of all the financial transactions of the business. It does not maintain any record of the transactions relating to the nominal account and real account except cash account.

3. Lack Of Arithmetical Accuracy
Single entry system is not based on the principles of debit and credit. It fails to provide the arithmetical accuracy of the books of accounts. Trial balance can not be prepared under this system to check the arithmetical accuracy of books of accounts.

4. Does Not Reflect True Profit Or Loss
Under single entry system, the true amount of profit or loss can not be ascertained because it does not maintain the nominal accounts.

5. Does Not Reflect True Financial Position
The single entry system does not maintain real accounts except cash book. Therefore, it can not reveal the true financial position of the business.

6. Frauds And Errors
The single entry system of book-keeping is incomplete, inaccurate and unscientific. It does not help to check the arithmetical accuracy of the books of accounts. Therefore, there is always a possibility of committing frauds and errors in the books of accounts.

7. Unacceptable For Tax Purpose
The single entry of book keeping has incomplete records of the financial transactions of the business. Hence, the tax office can not accept the account maintained under this system for the purpose of assessment of tax.

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Advantages Of Single Entry System

The following are the important advantages of single entry system:

Simple And Easy
Single entry system is simple to understand and easy to maintain as it has no fixed set of principles to follow while recording financial transactions.

Economy
Single entry system is an economical system of recording financial transactions. It does not require hiring skilled accounting personnel to record financial transactions of the business. Further, it does not require large number of books to record the limited number of financial transactions.

Easy To Calculate Profit
Under single entry system, the amount of profit can be determined easily. The amount of profit or loss of the period can be determined by making comparison between the amounts of closing capital and opening capital.

Suitable For Small Business
The single entry system is simple, easy, and economical system. It is suitable for small businesses because they can not afford the cost of double entry system. Besides, small business are not required to maintain their books of accounts under double entry system.

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Meaning And Features Of Single Entry System

Meaning Of Single Entry System
Single entry system is an incomplete form of recording financial transactions. It is the system, which does not record two aspects or accounts of all the financial transactions. It is the system, which has no fixed set of rules to record the financial transactions of the business. Single entry system records only one aspect of transaction. Thus, single entry system is not a proper system of recording financial transactions, which fails to present complete information required by the management. Single entry system mainly maintains cash book and personal accounts of debtors and creditors. Single entry system ignores nominal account and real account except cash account. Hence, it is incomplete form of double entry system, which fails to disclose true profit or loss and financial position of a business organization.

Features Of Single Entry System
The following are the main features of single entry system:

1. No Fixed Rules
Single entry system is not guided by fixed set of accounting rules for determining the amount of profit and preparing the financial statements.

2. Incomplete System
Single entry system is an incomplete system of accounting, which does not record all the aspects of financial transactions of the business.

3. Cash Book
Single entry system maintains cash book for recording cash receipts and payments of the business organization during a given period of time.

4. Personal Account
Single entry system maintains personal accounts of all the debtors and creditors for determining the amount of credit sales and credit purchases during a given period of time.

5. Variations In Application
Single entry system has no fixed set of principles for recording financial transactions and preparing different financial statements. Hence, it has variations in its application from one business to another.

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Differences Between Receipts And Payments Account And Income And Expenditure Account

The following are the main differences between receipts and payments account and income and expenditure account:

1. Nature
Receipts and payments account is a summary of cash transactions for a period and it is a real account. Income and expenditure account is a summary of expenditure and income like trading and profit and loss account and it is a nominal account.

2. Objective
Receipts and payments account is prepared to show cash and bank receipts and payments during the period to derive closing balance of cash and bank. Income and expenditure account is prepared to show the net result of the operation during the period to derive surplus or deficit.

3. Recording
All cash and cheque receipts are recorded on debit side of receipts and payments account where as all cash and bank payments are recorded on credit side. In income and expenditure account all expenditure of revenue nature are recorded on debit side and all incomes of revenue nature are recorded on credit side.

4. Capital And Revenue Items
There is no distinction between capital and revenue receipts and payments in receipts and payments account. All expenses and incomes of revenue nature are recorded on accrual basis in income and expenditure account.

5. Contents
Receipts and payments account contains only cash and bank transactions. Income and expenditure account contains both cash and non-cash expenses and incomes of revenue nature.

6. Balance Sheet Requirement
Receipts and payments account is not required to prepare balance sheet. Income and expenditure account is required to prepare balance sheet.

7. Adjustments
No adjustments are required in receipts and payments account. In income and expenditure account adjustments are made because it is prepared on accrual basis.

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