IA 3 Lecture Notes on Single Entry System. Problems and Solution PDF

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SINGLE-ENTRY SYSTEM ( System of Incomplete Records )

Objectives: 1. To understand the concept of single entry system in contrast to double entry sytem. 2. To identify the records kept under single entry system. 3. To determine net income using single entry method. 4. To be able to prepare financial statements based on single entry method.

I. SINGLE ENTRY SYSTEM   



It is a system of record keeping in which transactions are not analyzed and recorded in a double entry framework. The records are incomplete and maintained only by "bare-essentials". A system used by organizations whose activities are simple so that they do not need the services of bookkeeper. ( eg. small business enterprises including practicing professions and non-profit organizations) However, services of professional accountants are needed at least once a year to prepare financial report under accrual basis to review various documents.

DIFFERENCE BETWEEN SINGLE-ENTRY SYSTEM AND DOUBLE-ENTRY SYSTEM SINGLE-ENTRY SYSTEM  Incomplete records of account  No account title used just descriptive measures  Does not employ debit and credit

DOUBLE-ENTRY SYSTEM  Complete set of accounts maintained in journals and ledgers  Uses account titles  Required analysis of transactions in terms of debit and credit

II. RECORDS IN SINGLE-ENTRY SYSTEM 1. Day book or General Journal

Records transactions not involving cash in chronological order in narrative format.

2. Cash book

Records all transactions affecting cash such as receipts and disbursements in descriptive measures.

3. Debtors' and Creditors' Ledger

Records transactions which affects debtors' or creditors' account.

III. SINGLE ENTRY METHOD IN DETERMINING NET INCOME (LOSS) 

Also known as net assets approach, capital maintenance approach, valuation approach and economists' approach.

Formula for Proprietorship or Partnership Capital, End of the year

xx

Add: Withdrawals

xx

Total

xx

Less: Capital, Beginning of the year

xx

Additional Investments

xx

xx xx

Net income (loss)

Example: An entity had the following data for the current year. January 1

December 31

Total Assets

2,000,000

3,000,000

Total Liabilities

1,200,000

1,800,000

Additional Investments

600,000

Withdrawals

900,000

Example An entity provided the following information.

Retained Earnings Computations:

January 1

December 31

4,500,000

5,000,000

During the current year, the entity issued share capital with par value of Php Capital, Dec. 31 P1,200,000* 2,000,000 and fair value of Php 2,500,000 as 10 % share dividend. At year end, the declared a cash dividend of Php 3,000,000. Add:entity Withdrawals 900,000 Total Computations:

P 2,100,000

Retained 31 Less: Capital,Earnings, January 1December P 800,000**

P 4,000,000

Add: Share dividends at fair value Additional Investments 600,000

2,500,000 1,400,000

Cash dividend Net income

3,000,000 P 700,000

Total Total Assets - Total Liabilities Capital=

P 9,500,000

* ( Less: 3,000,000 - 1,800,000 = 1,200,000) Retained Earnings, January 1

(4,500,000)

Net income ** ( 2,000,000 - 1,200,000 = 800,000)

P 5,000,000

Formula for Corporation Retained Earnings, End of the year

xx

Add: Dividends or paid of Profit or Lossxx Another Formuladeclared for Computation Other End items decrease retained Equity, ofthat the year

xx

earnings not profit or loss Less: Equity, but Beginning of the year

xx

xx

TotalTotal increase ( decrease) in equity

xx

xx

Less:Add: Retained Earnings, Beg. of the year Amount Withdrawn

xx

Other items that increase retained Less: Additional Investments but not profit or loss Profitearnings (Loss) for the year Net income (loss)

xx xx

xx xx

xx

IV. Preparation of Financial Statements Based on Single Entry Methods A. Preparation of Income Statement 

Involves computation of individual revenue and expenses balances from cash receipts and disbursements and the changes in assets and liabilities.



Formulas used in converting cash basis to accrual basis of accounting are useful in this case. It involves the following: 1. Sales 2. Purchases 3. Income other than sales 4. Expenses

B. Preparation of Statement of Financial Position  

Involves inventorying, counting and verification procedures to determine the nature and amount of most assets and liabilities. The reference of accounting records under single entry system comes from various sources of information.

Possible Sources of Account Balances ACCOUNT

SOURCES

Cash

Cash on hand and cash records reconciled with bank statements

Accounts Receivable

Unpaid sales invoices; confirmation from customers

Inventory

Physical count and inventory purchase invoices.

Prepaid expenses

Physical count band reference to purchase orders.

Accounts Payable

Records, documents and confirmation from creditors.

Accrued Expenses and Other Liabilities

Reference to supporting documents, independent evidence and confirmation from outside parties

Equity

Total Assets - Total Liabilities

Illustration 1 Negros Store a proprietorship provided the following data obtained from the single entry records for the current year. December 31 Cash Notes Receivable Accounts Receivable Merchandise Inventory

January 1

890,000

600,000

600,000

200,000

1,000,000

800,000

500,000

800,000

Equipment

550,000

600,000

Notes Payable

250,000

350,000

Accounts Payable

500,000

600,000

Accrued Interest Payable

20,000

40,000

Unearned Rent Income

20,000

60,000

The cashbook showed the following information: Balance, January 1

600,000

Receipts: Accounts Receivable

1,500,000

Notes Receivable

500,000

Cash Sales

400,000

Rent Income

80,000

Sale of equipment costing 100,000 and with carrying amount of 50,000

60,000

Additional Investment

300,000

Total

2,840,000 3,440,000

Payments: Accounts Payable

750,000

Notes Payable

650,000

Cash Purchases

300,000

Interest expense

50,000

Expenses

400,000

Equipment

200,000

Withdrawals

200,000

2,550,000 890,000

Balance, December 31

Supplementary Information Sales discounts granted to customers

50,000

Sales returns made by customers

150,000

Accounts receivable written off as uncollectible Purchase discounts on accounts payable paid

30,000 40,000

SOLUTION: Step 1: Determine capital balance at the beginning and end of the year. Total Assets - Total Liabilities = Capital Balance

December 31

January 1

Assets Cash

P 890,000

Notes Receivable

600,000

Accounts Receivable

1,000,000

Merchandise Inventory

200,000 800,000

500,000

Equipment Total

P 600,000

550,000 P 3,540,000

800,000 600,000 P 3,000,000

Liabilities Notes Payable Accounts Payable

P 250,000

350,000

500,000

600,000

Accrued Interest Payable

20,000

40,000

Unearned rent income

20,000

60,000

Total

790,000

Capital Balance

P2,750,000

1,050,000 P1,950,000

Step 2: Compute the net income using single entry formula for proprietorship since the given data is for proprietorship. Capital, December 31

P 2,750,000

Add: Withdrawals

200,000

Total

P 2,950,000

Less: Capital, January 1 Additional Investment Net Income

P 1,950,000 300,000

2,250,000 P 700,000

Step 3: To prepare traditional income statement use the following necessary computations. A. Computation of Sales Notes receivable- December 31

P

600,000

Accounts receivable- December 31

1,000,000

Collections of accounts receivable

1,500,000

Collections of note receivable

500,000

Sales discounts

50,000

Sales returns

150,000

Accounts written off- bad debts

30,000

Total

P 3,830,000

Less: Notes receivable-January 1

P 200,000

Accounts receivable-January 1 800,000 Sales on account

1,000,000 P 2,830,000

Cash sales

400,000

Total sales

P 3,230,000

B. Computation of Purchases Notes payable- December 31

P 250,000

Accounts payable- December 31

500,000

Payment of accounts payable

750,000

Payment of notes payable

650,000

Purchase discounts

40,000

Total Less: Notes payable- January 1

P 2,190,000 P 350,000

Accounts payable- January 1

600,000

Purchases on account

P 1,240,000

Cash Purchases

300,000

Total Purchases

P 1,540,000

C. Computation of Interest Expense Interest paid

P 50,000

Add: Accrued interest payable - December 31 Total Less: Accrued interest payable- January 1 Interest Expense

20,000 70,000 40,000 P 30,000

D. Computation of Rent Income Rent received Add: Unearned rent income- January 1 Total Less: Unearned rent income- December 31 Rent income

E. Computation of Gain on Sale

950,000

P 80,000 60,000 140,000 20,000 P 120,000

Sale price

P 60,000

Less: Carrying amount of equipment sold

50,000

Gain on sale of equipment

P 10,000

F. Computation of Depreciation Equipment- January 1

P 600,000

Add: Equipment acquired

200,000

Total

800,000

Less: Equipment- December 31

P 550,000

Carrying amount of equipment sold

50,000

600,000

Depreciation

P 200,000

Negros Store Income Statement Year Ended December 31, 2020

Net Sales

(Note 1)

P 3,030,000

Cost of goods sold

(Note 2)

1,800,000

Gross income Other income

1,230,000 (Note 3)

130,000

Total income

P 1,360,000

Expenses: Expenses

P 400,000

Depreciation

200,000

Bad debts

30,000

Interest expense

30,000

660,000

Net income

P 700,000

Note 1- Net Sales Sales

P 3,230,000

Sales discounts

(50,000)

Sales returns Net sales

(150,000) P 3,030,000

Note 2- Cost of Goods Sold Merchandise inventory- January 1 Add: Purchases Purchase discounts Goods available for sale Merchandise inventory- December 31 Cost of Goods Sold

P 800,000 P 1,540,000 (40,000) 1,500,000 P 2,300,000 (500,000) P 1,800,000

Note 3- Other Income Rent income Gain on sale of equipment Total other income

P 120,000 10,000 P 130,000

Negros Store Statement of Financial Position December 31,2020

Assets Current Assets Cash Notes Receivable Accounts Receivable Merchnadise Inventory

P 890,000 600,000 1,000,000 500,000P 2,990,000

Noncurrent Asset Equipment

550,000

Total Assets

P 3,540,000

Liabilities and Equity Current Liabilities Notes Payable Accounts Payable

P 250,000 500,000

Accrued Interest Payable

20,000

Unearned Rent Income

20,000

Total Liabilities

P 790,000

Equity Capital, January 1

P 1,950,000

Add: Net Income

700,000

Additional Investment

300,000

Total Less: Withdrawals

2,950,000 200,000

Total Equity

2,750,000

Total Liabilities and Equity

P 3,540,000...