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

7.1. Types of reserves are determined as per the organizational objectives

Types of Reserves

Reserves are portions of a company’s profits set aside for specific purposes, either as a safety buffer or to fund future activities. The type of reserve a company maintains depends on its organizational objectives, legal requirements, and strategic plans.

1. Main Types of Reserves

1.1 Revenue Reserves

Purpose: Fund operational needs, expansion, or contingencies.
Source: Profits from normal business operations.
Examples:
- General reserve
- Dividend equalization reserve
Use: Can be distributed as dividends if the company chooses.

1.2 Capital Reserves

Purpose: Arises from non-operating activities; usually not available for dividend distribution.
Source:
- Sale of fixed assets above book value
- Revaluation of assets
- Premium on share issue
Use: Strengthen financial position or for specific capital projects.

1.3 Statutory or Legal Reserves

Purpose: Required by law or regulatory authorities.
Examples:
- Banking regulations may require a statutory reserve
- Insurance companies may have specific reserves
Use: Protect creditors and ensure financial stability

1.4 Specific or Special Reserves

Purpose: Set aside for clearly defined objectives.
Examples:
- Research & development reserve
- Dividend equalization reserve
- Contingency reserve

2. Accounting Treatment of Reserves

Creation of reserve:
- Dr Profit & Loss Account
- Cr Reserve Account
Utilization of reserve:
- Dr Reserve Account
- Cr Cash/Bank or Specific Expense Account

Note: Revenue reserves can be distributed as dividends, while capital reserves are usually retained in the business.

3. Key Points According to Organizational Objectives

Operational Efficiency: Revenue reserves support smooth running of business.
Expansion & Investment: Capital reserves fund growth projects.
Legal Compliance: Statutory reserves ensure the company meets regulatory requirements.
Risk Management: Special reserves mitigate unforeseen risks.

4. Short Exam-Ready Summary

Type of Reserve	Source	Purpose	Can be Divided as Dividend?
Revenue Reserve	Profits from operations	Operational needs, contingencies	Yes
Capital Reserve	Non-operating gains	Strengthen capital base	No
Statutory Reserve	Legal requirement	Protect creditors, comply with law	Usually No
Specific/Special Reserve	Defined objectives	R&D, contingencies, dividend smoothing	Depends on purpose