PAPER NO. 5 PRINCIPLES OF ACCOUNTING
UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to prepare and interpret the financial statements of different non-complex entities.
LEARNING OUTCOMES
A candidate who passes this paper should be able to:
• Prepare books of original entry and basic ledger accounts under the double entry system
• Prepare basic financial statements of sole traders, partnerships, companies, manufacturing entities and not for profit organizations
• Comply with the regulatory framework in the accounting field
• Analyse financial statements by use of ratios and statement of cash flows.
• Detect and correct accounting errors in financial records
CONTENT
1. Introduction to Accounting
1.1 The nature and purpose of accounting
1.2 Users of accounting information and their respective needs
1.3 Accounting Standards and their purposes (IFRS, IASs, IPSAS)
1.4 Elements of accounting statements
1.5 The qualitative characteristics of accounting information
1.6 Principles; concepts and conventions underlying the preparation of accounting statements
1.7 Regulatory framework (ICPAK, IASB, IAESB, IPSASB)
1.8 Professional ethics
1.9 Description of Social and environmental accounting
2. Accounting procedures and techniques
2.1 Source documents, the accounting cycle, the accounting equation
2.2 Double entry book-keeping
2.3 The ledger and their role in recording and summarising, classifying accounting data
2.4 Books of original entry
2.5 Petty cash book
2.6 Balancing accounts and preparing the trial balance
2.7 Introduction to simple statements of financial performance
2.8 Statements of financial position
3. Computerised accounting
3.1 Electronic data processing
3.2 Different accounting packages
3.3 Rationale for computerised accounting systems
3.4 Comparison between manual recording and computerised system
3.5 Components of a computerised accounting system
3.6 Challenges of a computerised accounting system
3.7 Current trends in computerised accounting software
4. Preparation of financial statements and year-end adjustments
4.1 Depreciation of non-current assets including their disposal (by part exchange; ordinary sale; accident)
4.2 Methods and reasons of providing for depreciation
4.3 Preparation of movement of property, plant equipment (as per International Financial Reporting Standards)
4.4 Trade receivables, bad debts write-offs and provision for bad and doubtful debts
4.5 Accruals, prepayments, reserves and provisions
4.6 Necessary adjustments in statements of financial performance to record increase and decrease in provision for bad and doubtful debts
4.7 Bad debts recovered
4.8 Accruals, deferrals, estimations and error correction adjustments and the cut off – procedure
4.9 The adjusted trial balance
5. Confirming and correcting mechanism
5.1 The cash book; two and three column including cash journal
5.2 Bank reconciliation statements
5.3 Control accounts
6. Errors and correction of errors
6.1 Errors revealed by the trial balance and the use of suspense account
6.2 Errors not revealed by the trial balance
6.3 The role of Internal control systems in controlling errors and frauds
7. Sole traders accounts
7.1 Income statements
7.2 Statements of financial position
8. Partnership accounts
8.1 Basic contents of a partnership agreement
8.2 Provisions of the Partnership Act
8.3 Partnership statement of financial performance and appropriation account
8.4 Partners current account and statement of financial position
8.5 Financial statements to reflect elementary changes in partnership such as admission, retirement and dissolution
9. Introduction to simple company accounts
9.1 Share capital and reserve
9.2 Issue of shares at par; premium; discount
9.3 Over and under subscriptions
9.4 Allotment and calls on shares, forfeiture of shares
9.5 Preparation of statements of financial performance and appropriation account and the statement of financial position
9.6 Published accounts: Components of a complete set of published financial statements only
10. Manufacturing accounts
10.1 Elements of cost and cost behaviour
10.2 Preparation of manufacturing accounts, statement of financial performance and statement of financial position
10.3 Accounting treatment of manufacturing profit or loss and unrealised profit on closing stock
11. Financial statements of a not-for-profit organisation
11.1 Characteristics of not-for-profit organisations
11.2 Receipts and payments accounts
11.3 Income and expenditure accounts and statement of financial position
12. Incomplete records and single entry book keeping
12.1 Preparation of statement of affairs
12.2 Preparation of income statement
12.3 Preparation of statement of financial position
13. Analysis of financial statements
13.1 Role of analysis in providing information for decision making
13.2 Cross sectional and common size analysis
13.3 Trend analysis
13.4 Financial ratio analysis: liquidity ratios, return ratios, margin ratios, coverage ratios, leverage ratios, capital structure ratios, turnover ratios, activity ratios, efficiency ratios, market evaluation (valuation) ratios, cost ratios etc
13.5 Working capital and cash operating cycle
13.6 Preparation of statement of cash flows (International Accounting Standard 7) using the direct and indirect methods
14. Public sector accounting
14.1 Features of public sector entities (as compared to private sector)
14.2 Structure of the public sector and examples of entities in public sector
14.3 Objectives of public sector financial statements
14.4 Users of public sector financial statements and officers (treasury, accounting officers, public accounts committee, auditor general)
14.5 IPSAS on inventory, property, plant and equipment and intangible assets (the ledger accounts of central and county governments are not examinable)
14.6 Accounting techniques in public sector (budgeting, cash, accrual, commitment and fund)
Sample reading and reference materials
1. Wood, F., & Robinson, S. (2018). Frank Wood’s Bookkeeping and Accounts (9th edition). Harlow: Pearson Education Limited.
2. Sangster, A. & Wood, F. (2018). Frank Wood’s Business Accounting Volume 1 (14th edition.) Harlow. Pearson Education Ltd.
3. Wang’ombe, D. (2008). Fundamentals of Accounting. Nairobi: Focus Publishers.
4. Kasneb e-learning resources (link available on the Kasneb website).
5. Kasneb approved study packs.