# 3.4 The net value of the business and the accounting equation

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## To calculate the ownership interest of the business [lo 3.5]

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

## [lo 3.5]

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 Assets + Assets purchased, e.g. equipment, vehicles etc., increase Assets –Cash in bank decreases 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

## Assignment 1:

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.

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

## Assignment 2

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

## Assessment

 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.

## Memorandum

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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