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APPLY FUNDAMENTALS OF ACCOUNTING
Unit Code: BUS/OS/AC/CR/01/6
UNIT DESCRIPTION
This unit outlines the competencies required to apply the fundamentals of accounting. It covers:
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Understanding accounting principles and policies
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Applying the double-entry system
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Classifying capital, liabilities, and assets
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Correcting accounting errors and preparing suspense accounts
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Preparing financial statements for sole traders, partnerships, and companies
ELEMENTS AND PERFORMANCE CRITERIA
Below are the elements (major competency areas) and their related performance criteria (required performance standards).
1. Demonstrate Understanding of Accounting Principles and Policies
Performance Criteria:
1.1 Establish the nature and purpose of accounting.
1.2 Identify users of accounting information and their information needs.
1.3 Determine the qualities of accounting information.
1.4 Identify accounting concepts/principles.
1.5 Determine relevant accounting standards.
1.6 Prepare the accounting equation.
2. Apply Double Entry Concept
Performance Criteria:
2.1 Prepare accounting source documents.
2.2 Determine the books of original entry.
2.3 Apply the double-entry system to prepare ledger accounts.
2.4 Prepare the trial balance and basic financial statements.
2.5 Apply computerized accounting systems in accordance with accounting guidelines.
3. Classify Capital, Liabilities and Assets
Performance Criteria:
3.1 Determine accrued and prepaid expenses according to accounting principles.
3.2 Apply accounting for revenue.
3.3 Determine accounts receivable, bad debts, and allowance for doubtful debts.
3.4 Manage property, plant and equipment (PPE) accounts.
3.5 Recognize and value inventory based on cost methods.
3.6 Account for cash and cash equivalents, including bank reconciliation.
3.7 Account for accounts payable, including creditors control account.
4. Correct Accounting Errors and Suspense Account
Performance Criteria:
4.1 Determine errors detectible by a trial balance.
4.2 Identify errors causing the trial balance not to balance.
4.3 Identify errors that do not affect the balancing of the trial balance.
4.4 Determine procedures for correcting errors according to organizational objectives.
4.5 Identify errors corrected using a suspense account.
4.6 Prepare the suspense account in line with standard operating procedures (SOPs).
5. Prepare Sole Trader Statement
Performance Criteria:
5.1 Establish sources of capital for a sole trader.
5.2 Draft the income statement for a sole trader for a given accounting period.
5.3 Prepare the statement of financial position for a sole trader for a given period.
6. Prepare Partnership Statements
Performance Criteria:
6.1 Determine the contents of a partnership agreement following SOPs.
6.2 Prepare current and capital accounts according to accounting standards.
6.3 Prepare the income statement according to accounting standards.
6.4 Prepare the appropriation account (profit/loss distribution).
6.5 Prepare the statement of financial position according to organizational requirements.
7. Prepare Company Statements
Performance Criteria:
7.1 Identify types of share capital as per the Companies Act.
7.2 Determine types of reserves as per organizational objectives.
7.3 Determine the issue of shares based on organizational requirements.
7.4 Calculate rights issues and bonus issues in accordance with company policies.
7.5 Identify provisions and reserves.
7.6 Calculate income tax according to SOPs.
7.7 Apply appropriate accounting treatment and presentation of company financial statements.
3. Classify capital, liabilities and Assets
3.2. Accrued expenses and prepaid expenses are determined as per the accounting principles
Accrued Expenses and Prepaid Expenses
These are adjustments made at the end of an accounting period to comply with the accrual principle of accounting, which states that expenses must be recorded in the period they are incurred, not necessarily when they are paid.
1. Accrued Expenses (Accrued Liabilities)
Definition:
Expenses that have been incurred during an accounting period but have not yet been paid by the end of the period.
Classification:
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Current liabilities on the Statement of Financial Position (Balance Sheet).
Examples:
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Salaries and wages payable
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Rent payable
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Utilities payable
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Interest on loans
Accounting Treatment (Double Entry):
| Transaction | Debit | Credit |
|---|---|---|
| Record accrued expense | Expense Account | Accrued Expense (Liability) |
Purpose:
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Recognizes expenses in the correct accounting period
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Ensures accurate profit or loss calculation
2. Prepaid Expenses (Prepayments)
Definition:
Expenses paid in advance for goods or services to be received in a future accounting period.
Classification:
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Current assets on the Statement of Financial Position.
Examples:
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Prepaid rent
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Prepaid insurance
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Prepaid subscriptions
Accounting Treatment (Double Entry):
| Transaction | Debit | Credit |
|---|---|---|
| Record prepaid expense | Prepaid Expense (Asset) | Cash/Bank |
Adjusting Entry at the End of Period:
When the prepaid expense is used up, it becomes an expense:
| Transaction | Debit | Credit |
|---|---|---|
| Allocate prepaid expense to current period | Expense Account | Prepaid Expense (Asset) |
Purpose:
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Ensures expenses are recorded in the period they relate to
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Prevents overstating expenses or understating assets
3. Key Accounting Principle
Both accrued and prepaid expenses are determined according to the accrual principle, which ensures:
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Expenses are matched with the revenue they help generate (Matching Principle)
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Financial statements reflect the true financial position of the business
Short Exam-Ready Summary
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Accrued expenses: Expenses incurred but not yet paid → liability → Dr Expense, Cr Accrued Expense.
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Prepaid expenses: Expenses paid in advance → asset → Dr Prepaid Expense, Cr Cash/Bank.
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Both are adjustments made to comply with the accrual principle for accurate financial reporting.