Chief Okafor operates a trading business and maintains records only for cash transactions and personal accounts of debtors and creditors, omitting entries for operating expenses and fixed assets in his ledger. Which of the following is a major limitation resulting directly from this incomplete bookkeeping practice?
- An extraction of a trial balance to verify the arithmetical accuracy of the ledger is impossible.Answer
- BThe business automatically loses its separate entity status, rendering the owner unable to keep personal money separate from business cash.
- CThe business is legally prohibited from engaging in credit sales or credit purchases with external trade parties.
- DThe net profit can only be computed by subtracting owner drawings directly from opening capital.
Answer
An extraction of a trial balance to verify the arithmetical accuracy of the ledger is impossible.
Under a single entry bookkeeping system, double entry rules are not strictly followed. Because nominal accounts (revenues and expenses) and real accounts are omitted, ledger accounts do not contain matching debit and credit entries. Consequently, a trial balance cannot be extracted to test the arithmetical accuracy of the books.
Step-by-Step Solution
Key Concept
Limitations of Single Entry System - Trial Balance Infeasibility
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