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:

Understanding accounting principles and policies
Applying the double-entry system
Classifying capital, liabilities, and assets
Correcting accounting errors and preparing suspense accounts
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

6.2. Contents of a partnership agreement are determined as per the SOPs.

Partnership Agreement Contents

A partnership agreement is a legal document that outlines the rights, responsibilities, and obligations of partners in a business. It ensures clarity, prevents disputes, and guides accounting for the partnership.

1. Key Contents of a Partnership Agreement

1.1 Name and Nature of the Partnership

Legal name of the partnership
Type of business activity
Duration of the partnership (fixed term or indefinite)

1.2 Capital Contributions

Amount of money or assets each partner contributes
Terms of additional capital contributions
Treatment of interest on capital, if any

1.3 Profit and Loss Sharing

Ratio in which profits and losses will be distributed among partners
May be equal or unequal depending on the agreement

1.4 Partner Salaries or Remuneration

Whether partners receive salaries for management services
Terms for calculating salaries

1.5 Interest on Drawings

Interest charged on money withdrawn by partners from the business
Helps prevent misuse of business funds

1.6 Admission, Retirement, or Death of Partners

Rules for admitting new partners
Procedure for retirement or death of a partner
How capital and profit shares are adjusted

1.7 Dissolution and Winding Up

Circumstances under which the partnership may be dissolved
Method for distributing assets and settling liabilities upon dissolution

1.8 Dispute Resolution

How disputes among partners will be resolved
May include mediation or arbitration clauses

1.9 Other Special Clauses

Restrictions on competition
Confidentiality agreements
Voting rights and decision-making processes

2. Key Points According to SOPs

The agreement must be signed and dated by all partners.
It must comply with local laws and accounting standards.
All financial and operational arrangements must be documented clearly.
Provides the basis for preparing capital accounts, current accounts, and profit/loss appropriation.

3. Short Exam-Ready Summary

A partnership agreement should clearly include:

Partnership name, business type, and duration
Capital contributions and interest on capital
Profit and loss sharing ratio
Partner salaries and interest on drawings
Rules for admission, retirement, or death of partners
Dissolution procedures
Dispute resolution mechanism
Special clauses (confidentiality, voting, restrictions)