A sole trader maintains business records by recording only cash transactions and personal accounts of customers and suppliers, leaving out real and nominal accounts. Which of the following represents a major limitation of this system of record-keeping?
- The arithmetical accuracy of the accounting records cannot be verified by extracting a trial balance.Answer
- BIt eliminates routine bookkeeping activities while focusing exclusively on financial statement analysis.
- CIt automatically merges the proprietor's personal transactions with business operations under the entity principle.
- DIt prevents profit determination because capital introduced must be added to closing capital when calculating profit.
Answer
The arithmetical accuracy of the accounting records cannot be verified by extracting a trial balance.
Under a single entry or incomplete records system, double-entry rules are not fully observed across all accounts (nominal and real accounts are mostly omitted). Consequently, debit and credit balances cannot be extracted to prepare a trial balance, making it impossible to check the arithmetical accuracy of the books.
Step-by-Step Solution
Key Concept
Limitations of Single Entry System