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Unit-15 Accounts From Incomplete Record-I

In this unit you will learn about the net worth method of ascertaining the profit of a business owned by a sole proprietor or a partnership firm.

Discuss the drawbacks of Single Entry System of accounting. Briefly explain the two methods of ascertaining profit when accounting records are incomplete. 





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Learning Pundits Content Team

Written on Apr 24, 2019 1:38:52 PM

There are two methods which can be used for ascertaining. the profits. They are:

Net Worth Method:

Under this method profits are computed by comparing the net worth or capital at the beginning of the accounting period with the net worth or capital at the end of the accounting period. This method does not involve the preparation of Trading and Profit and Loss Account. It is considered most suitable when the information available is too limited. 

Conversion Method:

Under single Entry System the Debtors' Ledger and Creditors' Ledger are usually maintained along with the Cash Book. Thus, though the records are incomplete, they provide sufficient information for preparation of the Trading and Profit & Loss Account. Hence the Conversion Method is employed for ascertaining the profits which involve the preparation of proper final accounts after working out the missing figures.

Single Entry System signifies the incompleteness and insufficiency of information. Hence, it suffers from certain limitations which can be summarized as follows:

1.'The arithmetical accuracy of the hooks of accounts cannot be checked as it is not ‘ possible to prepare a Trial Balance in the absence of real and nominal accounts.

2.Any information obtained under this system will not be free from doubt and so is unreliable.

3.It is not possible to prepare a Trading Account and find out the rate of gross profit earned by the firm. In the absence of gross profit margin, the performance of the firm cannot be compared with that of other firms or with the past. This also affects proper planning and sound decision-making.

4.True profit or loss and information about assets and liabilities, cannot be obtained with certainty. Hence, it is not possible to assess financial soundness of the firm.

5.In the absence of proper and reliable balance sheet, the firm may not be able to avail itself of the various financial facilities from banks such as overdraft facilities or loan facilities.

6.The system generates a spirit of laxity on the part of the employees which may result in frauds