Conversion Method of Single Entry into Double Entry System
If it is desired to calculate the profit by preparing Trading and Profit and Loss account under single entry then it is called a conversion method. Following steps are necessary to prepare Trading and Profit and Loss account and Balance Sheet from incomplete information.
Step 1: Opening Statement of Affairs: Prepare a statement of affairs in the beginning so as to calculate capital in the beginning. Take up the Statement of Affairs at the end of the earlier trading stage and open all those accounts which have not previously been opened. First, we need to find out the opening capital by preparing the opening Statement of Affairs. Usually, under the Single Entry System, cash, bank, and personal accounts are maintained.
Step 2: Other Accounts: From the debit side of the Cash Account, accounts other than the bank account and accounts of customers (on the presupposition that such accounts are previously maintained) should be credited. Then prepare (i) Total debtors account, and (ii) Total Creditors account, to find out credit sales, credit purchases, creditors or debtors balance either in the beginning or at the end.
The Cash Book/Cash Account should be prepared cautiously to find out missing figures such as sales, expenses, drawings, and closing balance of Cash/Bank, etc. From the credit side of the Cash Account, various accounts (other than the bank account and accounts of creditors) should be debited. On this side of the Cash Account, will be found amounts paid for cash purchases, for various expenses and for various assets acquired. All these accounts will be debited.
Step 3: Total sales and total purchase: After preparing these accounts, calculate
(1) Total sales, by adding cash sales and credit sales, and
(2) Total purchases by adding cash purchases and credit purchases.
If a Petty Cash Book is maintained, the monthly analysis will have to be posted in the ledger—various accounts for expenses debited and the total credited to Petty Cash Account. Total Debtors Account, Total Creditors Account, Bills Receivable Account and Bills Payable Account should be arranged. The debit to the Petty Cash Account must already have been completed from the Cash or Bank Account. These accounts will help to find out figures like Credit Sales, Credit Purchases, Balances of Debtors, Creditors, Bills payable and Bills receivable correspondingly.
Total Sales will be Cash Sales + Credit Sales. Total Purchases will be Cash Purchases + Credit Purchases
Step 4: Final Account: Necessary journal entries for the adjustments should be made as per information provided in the predicament. Now prepare Trading, Profit and Loss Account, and Balance Sheet. Finally, the Profit and Loss Account and The Balance Sheet can be prepared.
