Double and Single Entry System

Double and Single Entry System

Double entry system is based on the rules of debit and credit, where single entry system is not a proper system, rather an attempt by the small enterprise to maintain some record of their business. Difference between double entry and single entry system has been explained below;

1.    Standard Rules

Double entry use standard rules for recording the transactions, where single entry system is not rely a system and therefore does not have any standard rules. Under single entry system records are maintained as per understanding of businessman.

2.    Automatic Mistake Identification

With the help of Double entry system some of mistakes can be easily and automatically identified by the double entry system itself, however, this system does not provide ultimate guarantee of accuracy. In case of single entry system, automatic mistake identification does not exist.

3.    Cost

Double entry system is more costly than single entry system. There are numbers of cost associated with the double entry system like cost of finance manger, cost of stationary or cost of accounting software. Due to these costs, single entry system is preferred by the small businesses.

4.    Acceptability

Double entry system is the only system, which has acceptability and recognition all over the world. Single entry system does not have such recognition and acceptability. Therefore double entry system is followed by the companies all over the world.

5.    Financial Reporting

Accurate financial reports can only be prepared by the double entry system. It is not possible to prepare accurate financial reports with the help of single entry system, and report of single entry system cannot be relied, because single entry system by default does not support the preparation of accurate financial statements.

Fair presentation Concept

Fair presentation Concept

Fair presentation of financial statement can be achieved by applying following guidelines in the preparation of financial statements.

1.    Faith full Representation

Fair presentation may be achieved by representing or recognizing the transaction in accordance with the recognition criteria.

2.    Appropriate Accounting Policies

Fair representation may also be achieved by adopting the appropriate and reasonable accounting policies. IAS 8 provides guideline for policy selection.

3.    Presentation of Information

Fair representation may also be achieved by presentation information in a way that it provides reliable, comparable and understandable information.

4.    Additional Disclosures

Additional disclosure should be provided, when the requirement of international accounting standard are not sufficient to explain the financial impact of the transaction (element) of financial statement.

Going Concern Concept

Going Concern Concept

Going concern assumption has fundamental importance for user of financial statement, because going concern assumption has great influence on economic decision making.

1.    Continue to Exist

Going Concern means that organization would continue to exist in future. In the context of going concern, future means at least 12 months from the balance sheet date.

2.    Management Assessment

Management shall make an assessment about entity ability to continue or exist as Going Concern. Management shall make such assessment after detailed analyses about the entity.

3.    Not Going Concern

Organization is not regarded as going concern, when either management is planning for shut down (liquidate) or cease trading or there are such circumstance, which would result in closure of organization automatically (for example high losses).

4.    Financial Statement

If going concern assumption is valid i.e. entity will continue to exist for foreseeable future (at least 12 month from balance sheet), then financial statement are prepared on normal bases i.e. historical cost.  While going concern assumption is not valid, then financial statement are prepared on suitable bases i.e. recoverable amount.

5.    Profitability & Going Concern

Profitability and Going concern has close link, and ordinarily a profitable organization is deemed to be a going concern. However, management may like to make a detail assessment about going concern. In detail assessment management would look into different aspect like sources of funding, liquidity, future cash flows, future profitability.

Financial Statements Comparability Concept

Financial Statements Recognition Concept

Measurement Concept
Going Concern Concept

Consistency Concept

Consistency Concept

Consistency is one of the fundamental concepts for presentation of financial statement. Consistency is also required to be observed in selection & application of accounting policies .Some important Characteristics of consistency concept have been explained below;

1.    Presentation & Classification

Consistency is a concept related to continue presentation & classification of financial information. It means that organization will not change the presentation from one period to another.

2.    Continuity of Policy

Consistency concept is also associated with continue application of accounting policy from one period to another period. Management should not change accounting policy from one period to another. For example if plant is being depreciated under reducing method this year, then next year the same depreciation method is to be used.

3.    Comparability

Consistency concept is very important for comparability of financial statement. The information cannot be compared, until there is consistency of presentation and classification.

4.    Reasons for Change

Change in presentation is allowed, when there is requirement of regulator, international accounting standard. Change in presentation may also be due to more appropriate and logical presentation.

5.    Consistency of Policy & Presentation

Policy & presentation are two different concepts. Policy is more related to recording or processing of transaction, while presentation is related to presenting the information. In both cases consistency is required by international accounting standard. It means neither management would change policy or presentation without proper reasons.

Financial Statements Comparability Concept

Financial Statements Recognition Concept

Measurement Concept
Going Concern Concept

Comparability Concept

 Comparability Concept

• Comparability of Financial statement means that financial statement of a period is comparable with other period and also with financial statement of other companies. This concept has been elaborated below

1.    Comparable with previous period

Financial statement of a company should be comparable with Financial statements of previous period. It means that information is required to be presented in a way that it facilitates comparison with previous period.  Such comparison is important for financial performance evaluation of the company over the period of time.

2.    Comparable with Industry

Financial statements of company or entity should be presented in a way, that those Financial statements are comparable  with financial statements of other companies in  industry. This objective can be achieved by  preparing standard financial statement  as per requirement of International accounting Standards. It is important to note that such comparison is focuses on overall performance rather than item to item comparability.

3.    Comparability & Performance Evaluation

Comparability is important aspect for determining the financial performance of the company over the period of time. Such comparison is only possible, If information of different periods are comparable.

4.    Trend

Comparability is also an important aspect of establishing the trend. For example if last year sales were 10 million ,and this year sales are 12 million. Then there is trend of  sales growth. The trend information can be used by the management for forming important decision making. 

Financial Statements Comparability Concept

Financial Statements Recognition Concept

Measurement Concept
Going Concern Concept

Understandability Concept

 Understandability Concept

Factor of understandability means that factor which would improve the understandability of user. Factor of understandability can be explained in terms of easy language, disclosure & explanation, narration of accounting policies, application of IAS.

Financial statement should allow the easy understanding of the information presented in financial statement and there should be no difficult faced by the user for understanding the financial statement. The understandability can be achieved through the following.

1.    Use of Easy Language

First factor of understandability is easy language. It means financial statement must use easy language in the financial statement. Easy language is a relative terms, but management should keep in mind that a person with reasonable knowledge of accounting and economic should be able to understand the financial statement.

2.    Appropriate Disclosures & Explanation:

Second factor of understandability is appropriate disclosure & Explanation. It means financial statement understandability can be improved with the help of disclosure and explanation. The importance of disclosure & Explanation is more relevant in case of complex transaction.

3.     Narration of Accounting Policies

Third factor of understandability is narration of accounting policies. A comprehensive narration in this regard would help user of financial statement to understand the figure in the financial statements. Management should present the all important accounting policies in a comprehensive and concrete way.

4.    Application of IAS

Fourth factor of understandability is Application of international accounting standards by management in the preparation of financial statements. IAS are designed keeping in view the user economic decision needs, and therefore an important & effective tool for improving understandability

Financial Statements Comparability Concept

Financial Statements Recognition Concept

Measurement Concept
Going Concern Concept

Recognition Concept

Recognition Concept

Recognition is simply the inclusion of element of financial statement in either in statement of financial position or in statement of comprehensive income. There are two basic criteria for recognition i.e. identification of element and measurement of amount associated with element.

It means if an element is identified i.e. expense, asset, liability, equity and amount can be measured reliably, then it is recognized in the financial statement.

1.    Asset Recognition

Asset recognized when it is expected that future benefit associated with asset will flow to the organization, which will either will increase the assets of organization or reduce the liabilities of organization, and those inflow can be measured reliably. When the future benefit are not expected, then asset is not recognized, instead expense is recognized.

2.    Liability Recognition

When it is expected that liability will be settled and the amount of settlement can be calculated with reliability, then liability is recognized. When it is expected that a liability will not be settled, then it is recognized as income.

3.    Expense Recognition

Expense is recognized in the financial statement, when amount of expense can be measured reliably and that economic benefit received by the business. For example labour has performed (economic benefit received) and labour salary rate is fixed (expense can be measure reliably). We can record this salary in the financial statement as salary.

Financial Statements Comparability Concept

Financial Statements Recognition Concept

Measurement Concept
Going Concern Concept

Recognition Concept

Recognition Concept

Recognition is simply the inclusion of element of financial statement in either in statement of financial position or in statement of comprehensive income. There are two basic criteria for recognition i.e. identification of element and measurement of amount associated with element.

It means if an element is identified i.e. expense, asset, liability, equity and amount can be measured reliably, then it is recognized in the financial statement.

1.    Asset Recognition

Asset recognized when it is expected that future benefit associated with asset will flow to the organization, which will either will increase the assets of organization or reduce the liabilities of organization, and those inflow can be measured reliably. When the future benefit are not expected, then asset is not recognized, instead expense is recognized.

2.    Liability Recognition

When it is expected that liability will be settled and the amount of settlement can be calculated with reliability, then liability is recognized. When it is expected that a liability will not be settled, then it is recognized as income. Liability can be settled in many ways , liability settlement concept has been explained in my other article.

3.    Expense Recognition

Expense is recognized in the financial statement, when amount of expense can be measured reliably and that economic benefit received by the business. For example labour has performed (economic benefit received) and labour salary rate is fixed (expense can be measure reliably). We can record this salary in the financial statement as salary.

Measurement Concept