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
| Feature | Revenue Reserves | Capital Reserves |
|---|---|---|
| Source of Creation | Created 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. |
| Usage | Specific 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. |
| Purpose | Created 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. |