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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
5.2. Sources of capital for sole trader are established
Sources of Capital for a Sole Trader
Capital is the money or resources that a sole trader invests in their business to start operations and support growth. For a sole trader, the owner and the business are legally considered the same entity, so all capital comes from the owner or external financing.
1. Main Sources of Capital
1.1 Owner’s Personal Savings
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The most common source of capital for a sole trader.
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Money saved personally by the owner and invested into the business.
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Accounting Treatment:
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Dr Cash/Bank
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Cr Capital Account
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1.2 Retained Profits
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Profits from previous periods that are reinvested into the business.
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This is internal financing.
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Accounting Treatment:
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Dr Cash/Bank
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Cr Capital/Retained Earnings
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1.3 Loans and Borrowings
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Funds obtained from external sources such as banks or friends.
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Usually short-term or long-term debt.
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Accounting Treatment:
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Dr Cash/Bank
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Cr Loan/Bank Loan Payable
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1.4 Sale of Personal Assets
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The owner may sell personal property (e.g., car, equipment) and use the proceeds as capital.
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Accounting Treatment:
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Dr Cash/Bank
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Cr Capital Account
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1.5 Contributions from Family or Friends
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Financial support from family or friends in exchange for a share of profits or as a loan.
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Accounting Treatment: Similar to loans or capital injection.
2. Key Points
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Sole trader capital is primarily from the owner.
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Capital can be in the form of cash, assets, or other resources.
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The amount of capital determines the size and operations of the business.
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All capital contributions are recorded in the Capital Account in the ledger.
3. Short Exam-Ready Summary
Sources of capital for a sole trader include:
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Owner’s personal savings
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Retained profits from the business
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Loans or borrowings from banks or friends
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Sale of personal assets
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Contributions from family or friends
Accounting treatment: Increase cash or assets debit, increase capital or loan credit.