Conversion into Double Entry System:

Learning Objectives:

1. Define and explain conversion method.

2. How trading and profit and loss account and balance sheet is prepared under conversion method.

Conversion of books from single entry system to double entry system is possible either with retrospective (i.e., on and from a date before the date of conversion arrangements) or with a prospective effect (i.e., on and from the date on which arrangements are made for conversion).

Conversion with Prospective Effect:

If the conversion is to be made with prospective effect a statement of assets and liabilities of a trader on a given date must be prepared. Care should be taken to see that the opening cash and bank balances and also the amount of debtors and creditors appearing in the statement, tally respectively with the opening balances of the cash book and the totals of debit and credit balances,  extracted from the personal accounts of the ledger. An opening journal entry is to be made taking the items of assets and liabilities of the statement of affairs thus prepared and after opening the necessary ledger accounts the above journal entry is to be posted. All subsequent transactions are to be passed through different books of original entry such as cash book, purchase book, sales book, etc., and posted into ledger according to the principles of double entry.

Conversion With Retrospective Effect:

For example a trader whose accounting period begins on 1-1-1991 and the books have been maintained under single entry till 30-04-1991. It is decided to convert the books into double entry system with effect from 1-1-1991. This is a case of retrospective conversion. The recourse of the interim period i.e., from 1-1-1991 to 30-04-1991 are to be adjusted before the double entry system is adopted.

Assuming that a statement of affairs at the commencement of accounting period (31-12-1990) is available and single entry records consists of cash book and personal ledger, the process of conversion proceeds as follows:

1. Find out the total credit purchases and total credit sales. These can be obtained from the bought and sales ledger respectively.

2. A journal entry should be passed to incorporate the balances appearing in the statement of affairs. Items should be posted in the respective accounts in the ledger.

3. The cash book should be scrutinized and post the items of receipts and payments appearing in it in the appropriate accounts in the ledger.

4. Cash sales and cash purchases can also be found out from the cash book. The figures should be posted to the sales and purchases account respectively.

5. Post the credit sales and purchases in the ledger.

6. Personal ledger should be scrutinized. Pick up the items for which no corresponding double entry has been effected. These items mostly consist of discount allowed to customers, or discount received, returns inwards, allowances, transfers, bad debts, etc. These items should be posted in the ledger. It is now possible to prepare a trial balance followed by a trading and profit and loss account and balance sheet.

Abridged Conversion:

There is a way to obtain final results by short cut method. When a summary of cash and other transactions are given; information regarding assets and liabilities in the beginning and at the end of the year is available, the final accounts can be drawn. In such a case, the missing items which may be any of the following are to be found out from the given data:-

1. Capital

2. Credit purchase

3. credit sales

4. Bills receivable

5. Bills payable

6. Sundry debtors

7. Cash in hand and at bank

8. Stock in the beginning

Any of these items when unknown may be found out preparing a total debtors account and a total creditors account.

Total Debtors Account

Total Debtors Account

Capital:

If capital is unknown prepare the statement of affairs. The difference of assets and liabilities will represent the capital.

Credit Purchases:

If credit purchases are unknown it can be ascertained from the total creditors account. Add item No. 4, 5, 6, 7, 8 and subtract from the result  item No. 1 and 3. It can also be calculated in the following way:

Credit Sales:

If credit sales are unknown, it can be ascertain from the total debtors account. Add No. 4, 5, 6, 7, 8, 9 and subtract from the result item No. 1 and 3. It can be calculated in the following form:

Bills Receivable:

I bill receivable are unknown the same may be ascertained from the total debtors account. The formula is:

Item Nos. [(1) + (2) + (3)] – [(4) + (6) + (7) + (8) + (9)]

It may also be ascertained in the following form:

Bills Payable:

If bills payable are unknown the same may be ascertained from total creditors account:

Item Nos. [(1) + (2) + (3)] – [(4) + (6) + (7) + (8)]

It may also be calculated in the following form

Sundry Debtors:

If opening balance of sundry debtors are unknown we can calculate it by the following method:

Item Nos.  [(4) + (5) + (6) + (7) + (8) + (9)] – [(3) + (2)]

If closing balance of debtors is unknown:

Item Nos. [(1) + (2) + (3)] – [(4) + (5) + (6) + (7) + (8)]

Sundry Creditors:

If opening balance of sundry Creditors are unknown we can calculate it by the following method:

Item Nos.  [(4) + (5) + (6) + (7) + (8)] – [(2) + (3)]

If closing balance of Creditors is unknown:

Item Nos. [(1) + (2) + (3)] – [(4)+ (5) + (6) + (7)]

Cash in Hand and at Bank:

Prepare the cash book and balance it.

Opening Stock:

Sometime opening stock is unknown, if it is unknown it can be calculated from sales. In such a case from sales fin out the cost price of the goods sold. Add in the cost of goods sold the closing stock. Subtract from the result purchases during the year.

Example:

A trader started business on 1st January, 1991 with a capital of $50,000. He kept only a cash book and a personal ledger. An analysis of the cash book for the year 1991 gave the following figures:

Receipt from debtors $1,40,000; cash sales $42,000; payment to creditors $1,00,000; expenses paid $22,000; personal drawings $10,000; cash purchases $36,000.

On 31st December, 1991 the stock in hand was valued at $20,000 and the debtors and creditors were $1,20,000 and $ 1,10,000 respectively.

You are required to prepare a profit and loss account for the year ended 31st December, 1991 and a balance sheet as on that date, after making a reserve of $2,000 fro bad and doubtful debts.

Solution:

Calculation of credit purchases:

Total purchases = Credit purchases + Cash purchases
Total purchases = 2,10,000 + 36,000 = 2,46,000

Calculation of Credit Sales:

Total sales = Credit sales + Cash sales
Total purchases = 2,60,000 + 42,000 = 3,02,000

Trading and Profit and Loss Account
For the year ended 31st December, 1991

Balance Sheet as on 31st December, 1991

Note: For cash in hand and at the end of the year prepare cash book [Receipts: 50,000+1,40,000+42,000] – [Payments: 1,00,000 + 22,000 + 10,000 + 36,000] and find out the balance.

You may also be interested in other articles from “single entry system” chapter:

1. Definition and Explanation of Single Entry System
2. Defects/Limitations/Disadvantages of Single Entry System
3. Statement of Affairs – First Method
4. Difference Between Statement of Affairs and Balance Sheet
5. Conversion into Double Entry System