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If the owner of a business decides to sell the business, the price he wants for it will probably be equal to the net value. The net value is linked to the owners interest in the bussiness.
The assets of the business represent value. The owner of the business can claim whatever remains once the creditors have been paid. This can be expressed in the basic accounting equation, namely Assets = Ownership interest + Liabilities.
The firm, AJAX Dealers, owned the following assets:
Cash in bank - R 580
Land and buildings - R130 000
Furniture - R 6 785
Office equipment - R7 800
Debtors - R5 000
Delivery vehicle - R50 000
The firm owes the following amounts:
Cumpen Bookshop - R8 400
CD Equipment - R2 900
ELFI Furniture - R1 765
Every day transactions are concluded in the business world. These are events that can be measured in terms of money. These transactions, are the transfer of value from one party to another and always have an effect on the accounting equation.
| TYPE OF TRANSACTION | EFFECT ON ACCOUNTING EQUATION |
| 1 Capital contribution by the owner | 1 Assets + Cash in bank increases Ownership interest + Capital increases |
| 2 Withdrawal of capital by the owner (taking the money of the business for own use) | 2 Assets – Cash in bank decreases Ownership interest – Withdrawals increase, reducing the capital |
| 3 Purchase of assets for cash |
|
| 4 Payment of expenditure such as telephone, licence, water and electricity | 4 Assets – Cash in bank decreases Ownership interest – Expenditure such as telephone, rental, licence, etc. increase, reducing the owner’s profit |
| 5 Receipt of money for services provided | 5 Assets+ Cash in bank increases Ownership interest + Income increases. Current income increases, increasing the owner’s profit |
Indicate the effect of the following transactions in the table:
1 The owner deposits R5 000 in the bank account of the business.
2 The business purchases equipment to the value of R2 000 for cash.
3 The business receives R2 500 for services provided.
4 Pays office rental of R1 000 for the month.
5 The owner draws a business cheque for his own use, R200.
Show that the accounting equation still balances..
| No. | Assets:Influence | Assets:Reason | Owner’s equity: Influence | Owner’s equity:Reason |
Analyse the following transactions of Situ Dealers using the columns in the table below:
1 A building is purchased from Kalahari Ltd. and R17 000 is paid by cheque.
2 Caledon Suppliers are paid R163 by cheque for cleaning materials.
3 The owner, W. Wilmans, deposits additional capital of R5 000.
4 W. Wilmans draws a business cheque of R250 to pay for repairs to his house.
5 R1 000 rental for offices is paid.
6 He pays R500 to Eskom for electricity.
7 R850 is received for services provided.
| No. | Assets:Influence | Assets:Reason | Owner’s equity: Influence | Owner’s equity:Reason |
| Learning Outcomes(LOs) |
| LO 3 |
| Management, Consumer and Financial Knowledge and SkillsThe learner will be able to demonstrate knowledge and the ability to apply responsibly a range of managerial, consumer and financial skills. |
| Assessment Standards(ASs) |
| We know this when the learner: |
| 3.1 differentiates between financial concepts used in business (e.g. fixed assets, current assets, liabilities, owner’s equity); |
| 3.2 develops leadership and management strategies that will ensure a return on investments; |
| 3.3 completes source documents (e.g. receipts, deposit slips, cheques) and records elementary cash transactions in a statement of receipts and payments; |
| 3.4 uses keyboard skills and function keys in developing, storing and retrieving basic information; |
| 3.5 explains the concept and analyses a statement of net worth; |
| 3.6 investments the various methods of savings and investments (e.g. savings accounts, fixed deposits, shares, unit trusts), and calculates on a variety of investments. |
ACTIVITY 1:
Ownership interest = A – L
O = 200 165 – 13 065
O = 187 100
187 100 = 200 165 – 13 065
ACTIVITY 2:
ASSIGNMENT 1
| No. | Assets:Influence | Assets:Reason | Owner’s equity: Influence | Owner’s equity:Reason |
| 1. | +5 000 | Cash in bank increases | +5 000 | Ownership interest increases as a result of increase in capital |
| 2. | +2 000 | Equipment increases | ||
| -2 000 | Cash in bank decreases | |||
| 3. | +2 500 | Cash in bank increases | +2 500 | Profit increases as a result of increase in current income |
| 4. | -1 000 | Cash in bank decreases | -1 000 | Profit decreases as a result of increase in expenditure |
| 5. | -200 | Cash in bank decreases | -200 | Ownership interest decreases as a result of decrease in capital |
| Assets = Ownership interest 6 300 = 6 300 |
ASSIGNMENT 2
| No. | Assets:Influence | Assets:Reason | Owner’s equity: Influence | Owner’s equity:Reason |
| 1. | +17 000 | Buildings increase | ||
| -17 000 | Cash in bank decreases | |||
| 2. | -163 | Cash in bank decreases | -163 | Expenditure increases, profit decreases |
| 3. | +5 000 | Cash in bank increases | +5 000 | Capital increases, ownership interest increases |
| 4. | -250 | Cash in bank decreases | -250 | Capital decreases, ownership interest decreases |
| 5. | -1 000 | Cash in bank decreases | -1 000 | Expenditure increases, profit decreases |
| 6. | -500 | Cash in bank decreases | -500 | Expenditure increases, profit decreases |
| 7. | +850 | Cash in bank increases | +850 | Income increases, profit increases |
| Assets = Ownership interest | ||||
| 3 937 = 3 937 |
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