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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.
4. Correct accounting errors and suspense account
4.2. Errors that can be detected by the trial balance are determined.
Errors Detectable by the Trial Balance
A trial balance is a statement showing all ledger account balances: debits on one side and credits on the other. Its main purpose is to check that total debits equal total credits.
Some errors can be detected immediately because they cause the trial balance not to balance.
1. Types of Errors Detected by Trial Balance
1.1 Single-Sided Entry (Omission of One Side)
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Occurs when a debit or credit entry is completely omitted in the ledger.
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Example: Rent expense of Ksh 5,000 is debited but not credited to cash.
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Effect: Trial balance will not balance.
1.2 Transposition Error
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Occurs when two digits in a number are reversed.
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Example: Ksh 540 recorded as 450.
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Effect: Trial balance will not balance, usually by a difference divisible by 9.
1.3 Addition or Subtraction Error
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Occurs when totals of a ledger account are miscalculated.
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Example: Adding a column incorrectly in the purchases ledger.
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Effect: Trial balance will show a difference.
1.4 Partial Omission
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Only one part of a transaction is recorded in the ledger (either debit or credit).
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Example: Cash paid for supplies recorded only as credit.
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Effect: Trial balance fails to balance.
1.5 Carrying Forward Error
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Error made when transferring balances from ledger to trial balance.
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Example: Balance of Ksh 10,000 recorded as Ksh 1,000.
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Effect: Trial balance difference appears, detectable.
2. Key Point
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Only errors that affect the equality of debits and credits can be detected by the trial balance.
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Errors that do not affect the balance (e.g., wrong account used, complete omission of a transaction on both debit and credit sides) cannot be detected.
3. Short Exam-Ready Summary
Errors detectable by trial balance include:
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Single-sided entries (debit or credit missing)
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Transposition of numbers
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Addition or subtraction errors in accounts
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Partial omission of transaction
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Errors in carrying forward balances
These errors cause the trial balance not to balance and prompt investigation.