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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
5.1. Sole trader Income statement is drafted as per accounting period
Sole Trader Income Statement
The Income Statement (also called Profit and Loss Account) shows the financial performance of a sole trader over a specific accounting period. It calculates profit or loss by comparing revenues earned and expenses incurred.
1. Purpose of the Income Statement
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Determine profit or loss for the period
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Help the owner make business decisions
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Provide information to banks or investors
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Comply with accounting principles (accrual principle, matching principle)
2. Accounting Period
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The income statement is prepared for a specific period, usually:
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Monthly
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Quarterly
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Annually
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Only revenue earned and expenses incurred during the period are included.
3. Structure of a Sole Trader Income Statement
| Particulars | Amount (Ksh) |
|---|---|
| Revenue / Sales | X |
| Less: Cost of Goods Sold (COGS) | (Y) |
| Gross Profit | X - Y |
| Less: Operating Expenses | (Z) |
| - Rent | |
| - Salaries | |
| - Utilities | |
| - Depreciation | |
| Net Profit (or Loss) | Gross Profit - Expenses |
4. Key Points in Drafting
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Revenue Recognition: Only revenue earned during the period is included.
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Expense Matching: Expenses are matched to the period in which revenue was earned (matching principle).
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Accrual Adjustments: Include:
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Prepaid expenses (asset)
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Accrued expenses (liability)
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Cost of Goods Sold (COGS):
5. Example
Given:
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Sales: Ksh 150,000
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Opening Inventory: Ksh 20,000
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Purchases: Ksh 80,000
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Closing Inventory: Ksh 15,000
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Expenses: Rent Ksh 10,000; Salaries Ksh 25,000
Income Statement:
| Particulars | Amount (Ksh) |
|---|---|
| Sales Revenue | 150,000 |
| Less: COGS (20,000 + 80,000 – 15,000) | 85,000 |
| Gross Profit | 65,000 |
| Less: Expenses | 35,000 |
| Rent | 10,000 |
| Salaries | 25,000 |
| Net Profit | 30,000 |
6. Short Exam-Ready Summary
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The Income Statement shows profit or loss for a specific accounting period.
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Structure: Revenue – COGS = Gross Profit – Expenses = Net Profit/Loss
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Include adjustments for prepaid and accrued expenses.
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Helps evaluate business performance and make decisions.