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Difficulty: MediumMeaning, Features, and Limitations of Single Entry System

A retail trader keeps record of cash transactions and personal accounts of debtors and creditors, but does not maintain ledger accounts for expenses or revenues. Which of the following is a direct limitation of maintaining business records in this manner?

  1. A trial balance cannot be extracted to check the arithmetical accuracy of the records.Answer
  2. B
    The business loses its legal status as a separate entity distinct from the owner.
  3. C
    Routine bookkeeping tasks such as recording cash receipts become impossible to perform.
  4. D
    Net profit can only be computed by adding drawings to opening capital and subtracting closing capital.

Answer

A trial balance cannot be extracted to check the arithmetical accuracy of the records.
Under the single entry system, complete double-entry records for nominal accounts (expenses and income) are missing. Since corresponding debit and credit entries are not made for every transaction, total debit balances in the ledger will not equal total credit balances, making it impossible to extract a trial balance to test arithmetical accuracy.

Step-by-Step Solution

1
Identify the features of the bookkeeping system described
The trader maintains cash accounts and personal accounts while omitting nominal accounts (expenses and revenues), which describes the Single Entry System.
Single entry system only maintains partial double entry, recording cash and personal accounts while ignoring real and nominal accounts.
2
Analyze the consequences of omitting nominal accounts
Without debit and credit entries for every transaction across all classes of accounts, equality of debits and credits is not maintained.
Extraction of a trial balance relies strictly on the double-entry principle where total debit balances equal total credit balances.

Key Concept

Limitations of Single Entry System
Estimated Time:1m 0s
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Topics

Meaning, Features, and Limitations of Single Entry System

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