Q.State the limitations (demerits) of the Single Entry System of accounting.

This question tests whether a student can go beyond 'Trial Balance cannot be prepared' and explain the real business consequences that follow from incomplete records.

Limitations of the Single Entry System

1. No check on arithmetical accuracy — since real and nominal accounts are missing, a Trial Balance cannot be prepared, so clerical errors may go unnoticed.
2. True profit cannot be ascertained scientifically — profit is only an estimate, obtained either by comparing capital at two dates or by reconstructing accounts from incomplete data; it is never as reliable as profit computed under Double Entry.
3. True financial position is not known — the Statement of Affairs used to estimate capital is built partly on estimates and physical verification, so its figures may be inaccurate.
4. Comparison is difficult — without uniform, complete records, comparing performance across years, or against other firms, is unreliable.
5. Not accepted for legal and tax purposes — tax authorities, lending banks, insurers, and courts do not treat Single Entry figures alone as conclusive proof.
6. Fraud and errors are harder to detect and locate — there is no complete double-entry trail to trace a discrepancy back through.
7. Weak basis for managerial decisions — ratio analysis, cost control, and other tools that rely on complete financial statements cannot be applied meaningfully.

A common mistake is writing only two or three limitations and repeating the same idea in different words (e.g. 'profit is not known' and 'financial position is not known' treated as the same point without distinguishing them). Examiners expect distinct, clearly labelled points.