Introduction to the Conversion Method of Single Entry System
The Conversion Method of Single Entry System is a more scientific way of preparation of Final Accounts from Incomplete Records. It is also called the Transaction Approach.
The Balance Sheet Approach or The Statement of Affairs Method uses the technique of comparison of opening and closing capitals for calculation of profit or loss for a given period under Single Entry System. The biggest disadvantage here is that details of revenues (incomes) and expenses are not disclosed by the Statement of Calculation of Profit and Loss prepared in this approach. It does not furnish necessary accounting information.
Due to this limitation, another approach called the Transaction Approach or The Conversion Method was developed. The Conversion Method is a better approach for preparing accounts from incomplete records of transactions.
How does The Conversion Method of Single Entry System Work?
The Conversion Method of Single Entry System tries to convert the records from Single Entry to Double Entry system and then prepare Final Accounts from the same.
The steps in conversion of single entry to double entry can be listed as follows:
- First we need to find out the opening capital by preparing the opening Statement of Affairs.
- An opening journal entry needs to be passed to incorporate all assets, liabilities and capital in the books of accounts:
Assets …………………………. Dr
To Capital (Balancing Figure)
- The Cash Book/Cash Account should be prepared carefully to find out missing figures such as sales, expenses, drawings, closing balance of Cash/Bank etc.
- Total Debtors Account, Total Creditors Account, Bills Receivable Account and Bills Payable Account should be prepared. These accounts will help to find out figures like Credit Sales, Credit Purchases, Balances of Debtors, Creditors, Bills payable and Bills receivable respectively.
- Total Sales will be Cash Sales + Credit Sales. Total Purchases will be Cash Purchases + Credit Purchases
- The nominal accounts for expenses and revenues should be prepared with the help of the information ascertained from the Cash Book. If there are any cash transactions related to Real Accounts, those should also be recorded by preparing ledger accounts.
- Necessary journal entries for the adjustments should be made as per information provided in the problem.
- Finally the Profit and Loss Account and The Balance Sheet can be prepared.
In a Nutshell
In the Conversion Method of Single Entry, you will be provided with various information relating to different transactions in no particular order.
You will have to prepare the Opening Statement of Affairs and various ledger accounts as per the information provided in the problem.
Opening capital will be derived from the Opening Statement of Affairs.
The ledger accounts need to be balanced in proper order. After balancing the ledger accounts, missing information can be found out.
This information will help us to prepare the Final Accounts.
This topic can only be mastered with sufficient practice. The more you solve problems the more you gain understanding and command on it.
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Let us see an illustration for basic understanding.
Illustration 1- Finding out missing figures like Credit Sales and Purchases
From the following particulars extracted from the books of Mr. B kept under single entry system, you are required to find out the figures for Credit Sales and Credit Purchases
|Sundry Debtors on 1st Jan||4,425.00|
|Sundry Creditors on 1st Jan||2,691.00|
|Bills Receivable on 1st Jan||1,600.00|
|Bills Payable on 1st Jan||500.00|
|Cash Received from Debtors||17,235.00|
|Discount Allowed to Customers||174.00|
|Bad Debts written off||255.00|
|Cash Paid to Creditors||8,934.00|
|Discount allowed by Creditors||129.00|
|Cash Received against Bills Recv.||3,000.00|
|Returns to Suppliers||156.00|
|Payments against Bills Payable||1,400.00|
|Sundry Debtors on 31st Dec||4,167.00|
|Sundry Creditors on 31st Dec||2,835.00|
|Bills Receivable on 31st Dec||1,480.00|
|Bills Payable on 31st Dec||1,020.00|
The mission in this problem is to find the missing figures of Credit Purchases and Credit Sales. We are given information of transactions related to Debtors, Creditors, Bills Receivable and Bills Payable. Thus we will have to prepare the ledger accounts of Debtors, Creditors, Bills Receivable and Bills Payable to find out the required missing information.
The accounts would be prepared as follows:
One thing that is very important to notice in this solution is the order in which the accounts are balanced. Notice carefully that the Bills Receivable and Bills Payable accounts are balanced first.
The balancing figures from these accounts gives the amount of Bills Receivable gained from Debtors and Bills Payable accepted to Creditors respectively.
These figures are then posted to the Debtors and Creditors Accounts and finally the Credit Sales and Credit Purchases are found out as balancing figures from the Debtors and Creditors Accounts respectively.
Mr Simon, a retailer, does not keep any books of accounts, but does operate a business bank account. A summary of the bank statement for the year ended 31.03.2016 is given below:
His assets and liabilities on 31.03.2015 and 31.03.2016 were as follows:
Fixed Assets should be depreciated at 10%.
Prepare the Trading and Profit and Loss Account of Mr. Simon for the year ended 31.03.2016 and a Balance Sheet as on that date.
You will have to prepare the following working notes:
- Opening Statement of Affairs to find out opening capital.
- Debtors and Creditors Accounts to find out missing figures of credit sales and credit purchases respectively. Note that there are no cash purchases and sales as no information is given in the problem.
- We need to calculate the amount of rent and advertisement attributable to the current year. For this we will prepare a Rent Account and Advertisement Account in workings.
- Note that the closing balance of bank account is on the Receipts side. It means that the closing bank balance is negative or overdrawn balance.
Now we can prepare the Trading and Profit & Loss Account and Balance Sheet from the information obtained from the workings above:
So that all. The more you practice practical problems, the more you will be confident in conversion method of single entry system. Please let me know your feedback via the comments section below. Thanks for reading!