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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.
2. Apply double entry concept
2.2. Books of original entry are determined
1. Meaning of Books of Original Entry
These are records where transactions are first written down using data from source documents such as invoices, receipts, and credit notes.
They help to:
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Summarize similar types of transactions
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Reduce the workload in the general ledger
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Provide a clear audit trail
2. Types of Books of Original Entry (Subsidiary Books)
1. Sales Journal (Sales Day Book)
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Records credit sales of goods.
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Uses sales invoices as source documents.
2. Purchases Journal (Purchases Day Book)
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Records credit purchases of goods.
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Uses purchase invoices.
3. Sales Returns Journal (Returns Inwards Book)
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Records goods returned by customers.
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Uses credit notes issued.
4. Purchases Returns Journal (Returns Outwards Book)
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Records goods the business returns to suppliers.
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Uses debit notes issued.
5. Cash Book
Records all cash and bank transactions:
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Cash receipts
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Cash payments
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Cheques received and issued
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Bank transfers
Acts as both a book of original entry and a ledger.
6. Petty Cash Book
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Records small, regular expenses such as postage, transport, refreshments, stationery.
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Uses petty cash vouchers.
7. General Journal (Journal Proper)
Used for transactions that do not fit in other books, such as:
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Opening entries
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Closing entries
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Correction of errors
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Depreciation entries
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Adjusting entries
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Transfers between accounts
3. Purpose of Books of Original Entry
Books of original entry are used to:
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Record transactions in chronological order
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Group similar transactions for simplicity
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Provide accurate details for posting to ledger
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Reduce errors in the accounting system
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Keep clear documentation for audits
4. Summary Table for Exams
| Book of Original Entry | Type of Transaction | Source Document |
|---|---|---|
| Sales Journal | Credit sales | Sales invoice |
| Purchases Journal | Credit purchases | Purchase invoice |
| Sales Returns Journal | Goods returned by customers | Credit note |
| Purchases Returns Journal | Goods returned to suppliers | Debit note |
| Cash Book | Cash and bank transactions | Receipts, cheques |
| Petty Cash Book | Small cash payments | Petty cash vouchers |
| General Journal | Non-routine entries | Various |