Accounting students all over the world are taught about double entry system of accounting but there is another system called single entry system of accounting which is used by small business for the recording of their accounting transactions. Under this system cash receipts and cash payments are recorded so as to arrive at profit or loss figure, however, it ignores assets and liabilities which therefore leaves no scope of auditing of financial statements which makes it difficult for management or owner to have complete knowledge about the financial position of the company. In order to understand more about this concept, one should look at the advantages and disadvantages of single entry system –
Advantages of Single Entry System
Easy to Understand
The biggest advantage of this system is that it is very easy to understand and you do not need to have any professional accounting degree or knowledge in order to understand this system which is the case with double entry system where one needs to have accounting knowledge in order to prepare books of accounts of the company. In simple words, even the owner of a small business himself or herself can record the transactions using this system of accounting.
Economical
Since it is easy to understand anyone having basic mathematical knowledge can make the entries in the books which in turn results in a lot of saving for the company as the company does not have to recruit accountants who demand more salaries due to their professional nature and knowledge.
Time Saving
Since the company does not maintain multiple books it results in lot saving of time as owner has to see only one book so as to ascertain profit or loss figure which is not the case with double entry system where one has to prepare many books before arriving at profit or loss figure of the company.
Disadvantages of Single Entry System
Imperfect System
The biggest disadvantage of single entry system is that it is imperfect system implying that unlike double entry system which works on accounting principles and accounting conventions this system does not follow those principals which result in it showing the wrong picture of the company.
Unsystematic
In the case of double entry system transactions are first recorded in the ledger and from there company prepares trial balance, profit and loss account as well as balance sheet. In simple words, it is a systematic process which is not the case with single entry as it is unsystematic in nature.
Prone to Error and Fraud
In case of double entry system since for every debit entry there is corresponding credit entry which in turn results in it being more accurate which is not the case with single entry system and hence chances of errors happening under this system is more besides under this system since there is no auditing of books of accounts it is easy to manipulate figures which makes it easy for person to do fraud while making books of accounts.
As one can see from the above that single entry system has advantages as well as disadvantages but its disadvantages outweigh its advantages and that is the reason why this system of accounting is seldom used by companies anywhere in the world.