A sole trader, Mr. Adebayo, maintains his business records using a single entry system where only cash transactions and personal accounts of customers and suppliers are maintained. At the end of the accounting year, he attempts to extract a trial balance to verify the arithmetical accuracy of his ledger postings before preparing his annual financial statements. Which of the following best evaluates the structural limitation of Mr. Adebayo's record-keeping approach in relation to his goal?
- A trial balance cannot be extracted because real accounts representing assets and nominal accounts representing expenses and revenues are omitted from the ledger system.Cevap
- BA trial balance can still be extracted successfully, provided the net profit is determined first by adding drawings to opening capital and deducting closing capital.
- CThe trial balance will balance automatically because single entry bookkeeping treats the owner's personal capital contributions as business revenue and drawings as operational expenses.
- DA trial balance can be substituted directly by a cash book summary because single entry bookkeeping fulfills the full analytical scope of accounting without requiring ledger balancing.
Cevap
A trial balance cannot be extracted because real accounts representing assets and nominal accounts representing expenses and revenues are omitted from the ledger system.
The correct answer highlights the major limitation of the single entry system: because it lacks systematic recording of real accounts (assets) and nominal accounts (expenses and revenues), the double-entry principle is not maintained. Consequently, a trial balance cannot be extracted to check arithmetical accuracy.
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Limitations of the Single Entry System: Inability to Extract a Trial Balance