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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.
6. Prepare partnership statements
6. Prepare Partnership Statements
A partnership involves two or more individuals carrying on a business with shared profits and liabilities. Accounting for partnerships requires proper preparation of agreements, accounts, and financial statements.
6.1 Contents of a Partnership Agreement
A partnership agreement is a legal document that defines the rights and responsibilities of partners. It usually includes:
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Capital Contributions – Amount each partner invests.
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Profit and Loss Sharing Ratio – How profits and losses are divided.
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Interest on Capital – Interest payable on partner’s capital, if any.
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Interest on Drawings – Charges on money withdrawn by partners.
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Salary or Remuneration – Fixed salaries for partners if agreed.
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Admission or Retirement of Partners – Procedures for changes in partnership.
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Dissolution Terms – How assets and liabilities will be handled on dissolution.
Note: The partnership agreement must comply with SOPs and legal requirements.
6.2 Preparation of Current and Capital Accounts
Each partner usually has:
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Capital Account: Shows the original investment and permanent changes (e.g., additional capital, share of profit).
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Current Account: Shows temporary changes like drawings, salary, interest, and share of profit/loss.
Double Entry Examples:
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Investing Capital:
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Dr Cash/Bank
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Cr Partner’s Capital Account
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Partner’s Drawings:
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Dr Partner’s Current Account
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Cr Cash/Bank
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Share of Profit:
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Dr Profit & Loss Appropriation Account
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Cr Partner’s Current Account
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6.3 Partnership Income Statement
The Income Statement (Profit & Loss Account) for a partnership is similar to a sole trader but includes gross profit, expenses, and net profit to be shared among partners.
Steps:
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Calculate revenue and expenses.
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Deduct expenses from revenue to get net profit.
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Net profit is transferred to Profit & Loss Appropriation Account for distribution.
6.4 Appropriation of Profit and Loss Account
This account distributes profits (or losses) among partners according to the agreement.
Steps:
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Add interest on capital (if any).
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Deduct partner salaries (if any).
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Deduct interest on drawings (if any).
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Allocate remaining profit/loss according to profit-sharing ratio.
Example:
| Particulars | Amount (Ksh) |
|---|---|
| Net Profit | 100,000 |
| Add: Interest on Capital | 5,000 |
| Less: Partner Salaries | 10,000 |
| Remaining Profit | 95,000 |
| Share of Profit (Partner A 60%, Partner B 40%) | A: 57,000, B: 38,000 |
6.5 Partnership Statement of Financial Position (Balance Sheet)
The Statement of Financial Position shows assets, liabilities, and partners’ equity.
Steps:
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List current and non-current assets.
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List liabilities (loans, payables).
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List partners’ capital accounts and current accounts under equity.
Format Example:
| Assets | Ksh | Liabilities & Equity | Ksh |
|---|---|---|---|
| Cash | 50,000 | Loans Payable | 20,000 |
| Accounts Receivable | 30,000 | Accounts Payable | 10,000 |
| Inventory | 40,000 | Partner A Capital | 60,000 |
| PPE | 70,000 | Partner B Capital | 30,000 |
| Total Assets | 190,000 | Total Liabilities & Equity | 190,000 |
Short Exam-Ready Summary
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Partnership Agreement: Defines capital, profit-sharing, interest, salaries, and dissolution terms.
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Capital & Current Accounts: Record capital investments, drawings, and share of profits/losses.
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Income Statement: Calculates net profit/loss.
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Profit & Loss Appropriation: Distributes profit or loss among partners.
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Statement of Financial Position: Shows assets, liabilities, and partners’ equity.