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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
3.1. Accounting for revenue
Accounting for Revenue
Revenue is the income earned by a business from its normal operations, such as selling goods or providing services. Proper accounting ensures that revenue is recognized in the correct accounting period and accurately reported in financial statements.
1. Definition of Revenue
Revenue is the gross inflow of economic benefits arising from the ordinary activities of a business.
Examples:
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Sales of goods
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Service fees
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Interest income
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Rent income
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Commission income
2. Recognition of Revenue
Revenue should be recognized when it is:
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Earned (the goods or services have been delivered)
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Measurable (the amount can be reliably determined)
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Collectible (there is a reasonable expectation of receiving payment)
This follows the accrual principle:
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Revenue is recorded when earned, not necessarily when cash is received.
3. Accounting for Revenue (Double Entry Rules)
a) Cash Sales
When revenue is received in cash immediately:
| Transaction | Debit | Credit |
|---|---|---|
| Cash received from sale | Cash / Bank | Sales Revenue |
b) Credit Sales
When revenue is earned on credit (payment to be received later):
| Transaction | Debit | Credit |
|---|---|---|
| Sale on credit | Accounts Receivable | Sales Revenue |
c) Other Revenue
Other types of revenue, like interest or rent, are recognized as earned:
| Transaction | Debit | Credit |
|---|---|---|
| Rent earned but not yet received | Accounts Receivable | Rent Revenue |
| Interest earned but not yet received | Accounts Receivable | Interest Revenue |
4. Revenue and the Income Statement
Revenue is a key component of the Income Statement.
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Total revenue earned is recorded at the top of the Income Statement
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Expenses are deducted from revenue to determine profit or loss
5. Key Points in Revenue Accounting
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Accrual Principle: Revenue is recognized when earned.
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Matching Principle: Revenue must be matched with related expenses.
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Documentation: Sales invoices, receipts, and contracts support revenue entries.
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Internal Controls: Revenue should be verified to prevent errors or fraud.