QS Study

Limitations of Single Entry:

Single Entry System is an incomplete, incorrect, unscientific and haphazard method of book keeping. The name of the system itself shows that the double aspects of business transactions are not recorded. This system makes use of Double Entry System partly.

Incomplete and unscientific method: This system is incomplete, because real and nominal accounts are not prepared and also due to the fact that the debit and credit aspect of all transactions are not recorded.

Trial Balance cannot be prepared: Quite often this system does not record both the aspects of transactions, therefore, at the end of the year arithmetical accuracy of the books cannot be checked by preparing a trial balance.

Performance of the business cannot be ascertained: Trading, profit and loss account cannot be prepared and hence the gross profit, net profit and rate of net profit on sales cannot be known.

True financial position cannot be ascertained: It is very difficult to prepare balance sheet, so the true financial position cannot be ascertained.

Comparison with previous years performance is not possible: Due to incomplete information and non-availability of previous years’ information, comparison between the current and previous years’ performance cannot be made. Comparison is required to identify the areas of weakness and rectification.

Unacceptable to tax authorities: Tax authorities (income tax and sales tax) do not accept accounts prepared according to single entry system for computation of taxes.

Difficulty in obtaining loan: Accounts prepared according to this system are not accepted by banks and other money lending institutions, so it is very difficult to obtain loan.

Difficult to locate frauds: It is difficult to locate frauds under this system and so employees may become dishonest and negligent. It encourages misappropriation, fraud and carelessness.

Difficult to determine the price of the business: Due to the absence of true and reliable net profit or assets and liabilities, it is difficult to determine the price of the business at the time of its sale.