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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.
3. Classify capital, liabilities and Assets
3. Classify Capital, Liabilities and Assets
This element involves identifying different categories of assets, liabilities, and capital, and applying correct accounting treatment for each according to accounting principles.
3.1 Accrued Expenses and Prepaid Expenses Are Determined
Accrued Expenses (Accrued Liabilities)
These are expenses incurred but not yet paid at the end of the accounting period.
They increase liabilities.
Examples
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Accrued salaries
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Accrued rent
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Accrued electricity
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Accrued interest
Double Entry
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Dr Expense
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Cr Accrued Expense (Liability)
Prepaid Expenses (Prepayments)
These are expenses paid in advance for future periods.
They are classified as current assets.
Examples
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Prepaid rent
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Prepaid insurance
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Prepaid advertising
Double Entry
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Dr Prepaid Expense (Asset)
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Cr Cash/Bank
3.2 Accounting for Revenue
Revenue is recognized when earned, not when cash is received (accrual principle).
Types of Revenue
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Sales revenue
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Service income
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Interest income
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Rental income
Double Entry
When revenue is earned:
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Dr Accounts Receivable / Cash
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Cr Revenue
Revenue increases equity/capital.
3.3 Accounting for Accounts Receivable, Bad Debts and Allowance for Doubtful Debts
Accounts Receivable (Debtors)
Customers who owe the business money for goods/services sold on credit.
Classified as current assets.
Double Entry for Credit Sales
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Dr Accounts Receivable
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Cr Sales
Bad Debts
Amounts confirmed as uncollectible.
Classified as an expense.
Double Entry
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Dr Bad Debts Expense
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Cr Accounts Receivable
Allowance for Doubtful Debts (Provision for Bad Debts)
A percentage estimate of receivables expected to become bad.
Classified as a contra-asset (reduces accounts receivable).
Double Entry
To create allowance:
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Dr Doubtful Debts Expense
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Cr Allowance for Doubtful Debts
3.4 Property, Plant and Equipment (PPE) Accounts Are Managed
PPE are long-term assets used in the business for more than one year.
Examples
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Buildings
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Machinery
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Motor vehicles
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Furniture and fittings
Key Accounting Treatments
1. Initial Cost
Includes purchase price + installation + delivery.
2. Depreciation
Allocation of asset cost over its useful life.
Double Entry for Depreciation
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Dr Depreciation Expense
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Cr Accumulated Depreciation
3. Disposal of Asset
When asset is sold or scrapped:
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Remove cost
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Remove accumulated depreciation
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Record gain or loss
3.5 Inventory Is Recognized, Measured and Valued Based on Cost Method
Inventory includes goods held for resale.
Recognition
Inventory is recorded when the business takes ownership of goods.
Measurement
Inventory is measured at cost, which includes:
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Purchase price
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Transport (carriage inwards)
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Import duty
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Handling costs
Valuation Methods
(Using cost principle)
1. FIFO (First In, First Out)
Oldest items are sold first.
2. Weighted Average Cost
Average cost per unit is applied.
3. Specific Identification
Each item tracked individually.
Note: Inventory must be valued at the lower of cost or net realizable value (NRV).
3.6 Accounting for Cash and Cash Equivalents, Bank Reconciliation
Cash and Cash Equivalents Include:
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Cash at hand
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Cash at bank
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Short-term deposits
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Treasury bills
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Petty cash
These are classified as current assets.
Cash Book
Records all cash and bank transactions.
Acts as:
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A book of original entry
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A ledger account
Petty Cash Book
Used for small payments such as:
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Postage
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Stationery
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Local transport
Operates under the imprest system.
Bank Reconciliation Statement
Prepared to match the cash book (bank column) with the bank statement.
Differences arise from:
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Unpresented cheques
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Deposits in transit
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Bank charges
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Direct deposits or debits
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Errors in cash book or bank statement
Purpose:
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Detect errors
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Prevent fraud
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Ensure accurate cash records
Short Exam-Ready Summary
Assets include resources such as cash, receivables, inventory, and PPE.
Liabilities include obligations such as accrued expenses and accounts payable.
Capital is the owner’s investment plus retained profits.
This element requires:
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Determining accrued and prepaid expenses
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Recognizing revenue when earned
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Accounting for receivables, bad debts, and allowances
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Managing PPE through cost, depreciation, and disposal
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Recognizing and valuing inventory using cost methods
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Accounting for cash, cash equivalents, and preparing bank reconciliation statements