accoiuntinmg
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.
7. Prepare company statements
7.2. .Types of share capital are identified as company’s Act
Types of Share Capital
Share capital represents the funds a company raises by issuing shares to shareholders. The Companies Act specifies the types of shares that a company can issue.
1. Ordinary (Equity) Shares
-
Definition: Standard shares representing ownership in the company.
-
Rights:
-
Voting rights at general meetings
-
Right to dividends (after preference shareholders)
-
Right to share in residual assets upon liquidation
-
-
Risk & Return: High risk, potentially high returns through dividends and capital gains.
2. Preference Shares
-
Definition: Shares with fixed dividend paid before ordinary shares.
-
Rights:
-
Fixed dividend (priority over ordinary shares)
-
Usually no voting rights, except in certain situations
-
Priority in repayment during liquidation
-
-
Types:
-
Cumulative preference shares – unpaid dividends accumulate.
-
Non-cumulative preference shares – unpaid dividends are not carried forward.
-
Redeemable preference shares – company can buy back at a future date.
-
Convertible preference shares – can be converted to ordinary shares.
-
3. Issued, Authorized, and Paid-Up Share Capital
-
Authorized Capital: Maximum amount of share capital a company can issue.
-
Issued Capital: Portion of authorized capital actually issued to shareholders.
-
Paid-Up Capital: Portion of issued capital actually paid by shareholders.
Example:
-
Authorized: Ksh 1,000,000
-
Issued: Ksh 600,000
-
Paid-up: Ksh 500,000
4. Accounting Treatment
-
Dr Cash/Bank – when money is received
-
Cr Share Capital (Ordinary/Preference) – increases equity
Short Exam-Ready Summary
-
Ordinary Shares: Voting rights, dividends, residual claim.
-
Preference Shares: Fixed dividend, priority in liquidation, usually no voting.
-
Authorized, Issued, Paid-Up Capital: Legal and accounting distinctions.