Double Entry vs. Single Entry Systems & Reserve Types

Double Entry vs. Single Entry System

Q9: What is the Double Entry System? What are the differences between Double Entry and Single Entry systems?

Answer:

Double Entry System: The accounting system under which both aspects (debit and credit) of a transaction are recorded in the books of accounts is called the Double Entry System. This is considered the most comprehensive and scientific system of accounting.

Key Differences

Single Entry System

  • Only cash accounts and personal accounts are maintained. Therefore, not all necessary information can be obtained.
  • It does *not* provide a complete record of all transactions.
  • A Trial Balance *cannot* be prepared, making it impossible to test the accuracy of entries.
  • Without nominal accounts, it’s *not* possible to prepare a Trading and Profit & Loss Account to determine gross/net profit or loss.
  • No accounts are maintained for assets and liabilities, so a Balance Sheet *cannot* be prepared. A statement of affairs may be created, but it’s not considered reliable.

Double Entry System

  • All accounts (personal, real, and nominal) are maintained. Necessary information can be easily obtained.
  • It provides a *complete* record of transactions, as both aspects are recorded.
  • A Trial Balance *can* be prepared to test the arithmetical accuracy of the books.
  • Trading and Profit & Loss Accounts *can* be prepared, and the correct net result of the business can be ascertained.
  • A Balance Sheet *can* be prepared, showing the correct financial position.

Revenue Reserve vs. Capital Reserve

Q10: What are the differences between Revenue Reserve and Capital Reserve?

Answer:

Distinction Between Revenue and Capital Reserves

FeatureRevenue ReservesCapital Reserves
Source of CreationCreated from revenue profits arising from normal operating activities, otherwise available for dividend distribution.Created from capital profits, which do *not* arise from normal operating activities and are *not* available for dividend distribution.
UsageSpecific reserves can be used only for their specific purpose, while general reserves can be used for any purpose, including dividend distribution.Normally, these *cannot* be used for dividend distribution. Some may be used for dividends, subject to conditions in the Companies Act.
PurposeCreated to meet unforeseen losses and strengthen the financial position of the business.Created to meet capital losses or for purposes outlined in the Companies Act.