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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
6.1. Current and capital accounts are prepared as per the SOPs as per accounting standards
Current and Capital Accounts for Partners
In a partnership, each partner has two main accounts in the ledger:
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Capital Account – Records permanent investments made by the partner and their share of accumulated profits.
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Current Account – Records temporary transactions such as drawings, interest on capital, partner salaries, and share of profit/loss.
These accounts are prepared as per SOPs and accounting standards to ensure accurate tracking of each partner’s equity and transactions.
1. Capital Account
Purpose:
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To show the partner’s initial and additional investment in the business.
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To reflect the partner’s permanent share of profit.
Typical Entries in Capital Account:
| Transaction | Debit | Credit |
|---|---|---|
| Initial investment by partner | – | Cash/Bank |
| Additional capital introduced | – | Cash/Bank |
| Partner’s share of profit | – | Profit & Loss Appropriation Account |
| Withdrawal of capital (if any) | Cash/Bank | – |
Key Point:
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Permanent balance that remains in the business unless the partner withdraws capital.
2. Current Account
Purpose:
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To track temporary transactions affecting the partner’s equity:
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Drawings
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Salary or remuneration
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Interest on capital or drawings
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Share of profit/loss
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Typical Entries in Current Account:
| Transaction | Debit | Credit |
|---|---|---|
| Drawings by partner | Current Account | Cash/Bank |
| Salary to partner | Profit & Loss Appropriation Account | Current Account |
| Interest on drawings | Current Account | Profit & Loss Appropriation Account |
| Share of profit | Profit & Loss Appropriation Account | Current Account |
Key Point:
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Current account starts with zero each period and adjusts with transactions throughout the accounting period.
3. Preparation Steps According to SOPs
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Open ledger accounts for each partner:
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Capital Account
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Current Account
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Record capital contributions in the capital account.
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Record drawings, salaries, and interest in current accounts.
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Allocate share of profits or losses from the Profit & Loss Appropriation Account to current accounts.
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Prepare closing balances:
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Capital account shows permanent capital
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Current account shows net effect of temporary transactions
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4. Example
Assume:
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Partner A invests Ksh 100,000 and Partner B invests Ksh 50,000.
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Drawings: A = 10,000; B = 5,000
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Profit sharing: A 60%, B 40%
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Partner salaries: A = 5,000, B = 3,000
Capital Accounts:
| Partner | Dr | Cr | Balance |
|---|---|---|---|
| A | – | 100,000 | 100,000 |
| B | – | 50,000 | 50,000 |
Current Accounts:
| Partner | Dr | Cr | Balance |
|---|---|---|---|
| A | Drawings 10,000 | Profit share + Salary 65,000 | 55,000 (Cr) |
| B | Drawings 5,000 | Profit share + Salary 38,000 | 33,000 (Cr) |
5. Short Exam-Ready Summary
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Capital Account: Permanent investment + share of accumulated profits.
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Current Account: Tracks temporary transactions like drawings, salary, interest, and share of profits/losses.
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SOP Compliance: Accounts must reflect accurate partner equity, follow double-entry principles, and comply with accounting standards.
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Closing Balances: Capital = permanent investment; Current = net temporary transactions.