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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
2.1. Double entry system is applied to prepare ledger accounts.
1. Meaning of the Double Entry System
The double entry system states that for every debit (Dr), there must be a corresponding credit (Cr) of equal value.
This follows the accounting equation:
2. Rules of Double Entry
The rules are applied depending on the type of account:
| Account Type | Increase | Decrease |
|---|---|---|
| Assets | Debit | Credit |
| Expenses | Debit | Credit |
| Liabilities | Credit | Debit |
| Capital/Equity | Credit | Debit |
| Revenue/Income | Credit | Debit |
3. Steps for Applying Double Entry in Ledger Accounts
Step 1: Identify the accounts involved
Every transaction affects two accounts or more.
Step 2: Determine the type of each account
Is it an asset, liability, capital, expense, or income account?
Step 3: Apply the double entry rule
Decide which account to debit and which to credit.
Step 4: Post to the ledger
Enter the information in the appropriate ledger accounts, including:
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Date
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Details (narration)
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Amount
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Folio (if used)
Step 5: Balance off the ledger account
At the end of a period, each ledger account is balanced to find:
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Balance c/d (carried down)
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Balance b/d (brought down)
4. Worked Examples
Example 1: Owner invests Ksh 100,000 into the business
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Dr Cash (asset increases)
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Cr Capital (capital increases)
Ledger Entries:
Cash Account
| Date | Details | Debit | Credit |
|---|---|---|---|
| xx/xx | Capital | 100,000 | — |
Capital Account
| Date | Details | Debit | Credit |
|---|---|---|---|
| xx/xx | Cash | — | 100,000 |
Example 2: Bought furniture for cash Ksh 20,000
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Dr Furniture
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Cr Cash
Example 3: Sold goods on credit to John for Ksh 15,000
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Dr Accounts Receivable (John)
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Cr Sales
Example 4: Paid electricity bill Ksh 5,000
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Dr Electricity Expense
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Cr Cash
5. Purpose of Applying Double Entry to Ledgers
Applying the double entry system ensures:
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Accuracy of financial records
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Completeness of transactions
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Ability to detect some errors
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Preparation of trial balance
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Preparation of financial statements
The ledger forms the basis for:
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Trial Balance
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Income Statement
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Statement of Financial Position
6. Short Exam-Ready Answer
The double entry system requires every transaction to be recorded with equal debits and credits. Ledger accounts are prepared by identifying the accounts affected, applying the debit and credit rules, posting entries to the relevant ledger accounts, and balancing them. This ensures accurate records that lead to the preparation of the trial balance and financial statements.