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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.
5. Prepare sole trader statement
Errors That Cause the Trial Balance Not to Balance
When preparing a trial balance, the total debits must equal total credits.
Some errors break this equality, making the trial balance show a difference. These errors are easily detectable.
1. Types of Errors That Cause Imbalance
1.1 Single-Sided Entry (Omission of One Side)
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Definition: Only one side of a transaction is recorded (either debit or credit).
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Effect: Trial balance totals do not match.
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Example: Paid Ksh 5,000 rent but only credited cash; debit not recorded.
1.2 Transposition Error
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Definition: Digits of a number are reversed when posting.
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Effect: Trial balance difference appears.
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Example: Ksh 540 posted as Ksh 450 (difference = Ksh 90).
1.3 Addition or Subtraction Error
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Definition: Mistakes in totaling ledger accounts or trial balance columns.
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Effect: Difference appears in trial balance.
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Example: Total of purchases ledger column is 25,000 instead of 26,000.
1.4 Partial Omission
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Definition: Only one part of a double-entry transaction is recorded.
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Effect: Trial balance does not balance.
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Example: Paid supplier Ksh 3,000 but recorded only debit to supplies account; credit to cash omitted.
1.5 Carrying Forward or Balance Transfer Error
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Definition: Incorrectly transferring ledger balances to trial balance.
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Effect: Trial balance totals mismatch.
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Example: Ledger balance Ksh 10,000 entered as 1,000.
2. Key Characteristics
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Trial balance will show a difference.
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Errors are detectable immediately.
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Correction requires identifying the specific account and nature of the error.
3. Short Exam-Ready Summary
Errors causing the trial balance not to balance include:
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Single-sided entries (debit or credit missing)
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Transposition errors (digits reversed)
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Addition or subtraction errors in ledger totals
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Partial omission of a transaction
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Errors in carrying forward balances to trial balance