Q.Why is the profit ascertained under the Single Entry System considered only an estimate, and not a scientifically computed figure?
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Start your 14-day free trial to unlock the full solution →Under Double Entry Book-Keeping, profit is measured directly and scientifically: a Trading Account brings together actual sales, purchases and direct expenses to find gross profit, and a Profit and Loss Account then brings together every actual nominal (income and expense) account to find net profit — every figure used is drawn from a verified, ledger-recorded account.
Under the Single Entry System, however, real and nominal accounts are largely missing, so no such Trading and Profit and Loss Account can be built directly. Instead, the Net Worth Method infers profit only INDIRECTLY, by comparing the trader's Capital at two dates — and several of the figures feeding into each Statement of Affairs (an estimated stock value taken from a rough physical count, an assumed value for furniture, a debtors figure that may not perfectly match what is actually collectible) are themselves only estimates, not verified ledger balances. Any asset or liability the trader genuinely forgot to record at either date also silently distorts the capital figure and, through it, the profit computed. …
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