Assets, liabilities and ownership interest

Economic and management sciences

Grade 8

Business, consumer and financial knowledge and skills

Module 10

Assets, liabilities and ownership interest

Accounting is based on three elements. Assets, liabilities and ownership interest. During every transaction in the business, these three elements interact. It is very important to have a sound understanding of assets, liabilities and ownership interest to be able to make a distinction between them.

Activity 1: to be able to explain and apply the concept assets [lo 3.1]

Assets:

These are the items that are owned by a business and which have value. These assets can be divided into two groups: fixed assets and current assets.

Fixed assets:

These are assets in the form of property with a relatively long life and which are used for production or use , rather than for resale, for example land and buildings, vehicles and equipment.

Current assets:

These are assets in the form of cash or assets that can be converted to cash within a short period of time, usually a year , for example: trading stock, debtors, cash in the bank, petty cash and bills.

Trading stock:

Goods purchased for the purpose of selling at a profit.

Debtors:

People who owe money to the business.

Division of assets

• Divide a piece of cardboard or paper in half and paste pictures from magazines on it so that the one half represents fixed assets and the other current assets .

Recognition of assets

• Underline those items that will be classified as assets in a business:

1. Computers

2. Modern office building

3. Delivery vehicles

4. Driver of the delivery vehicle

5. Creditors

6. The owner’s personal luxury vehicle

7. Trained computer personnel

8. An unattractive building on the business premises that is leased to another business as a storage facility.

Activity 2: to be able to explain and apply the concept liabilities [lo 3.1]

Liabilities

These are obligations or debt of one business or person to another business or person.

• When money is borrowed from a financial institution or other business, a liability known as a loan arises.
• When a business uses overdraft facilities on its current account, it owes money to the bank, and this is called an overdrawn bank account.
• Stock or services purchased on credit result in a liability known as creditors.

Current liabilities

These are obligations that must be repaid within a period of a year or less , for example creditors.

Long-term liabilities

These are liabilities that are repayable over a longer period , for example a loan.

• Answer the following questions:

1. What does one call the persons to whom the business owes money?

2. Is the following correct or incorrect?A mortgage loan for the purchase of a building and which is repayable after 20 years is called a current liability. (Answer only Yes or No)

3. Is the following correct or incorrect?Trading stock purchased on credit represents a current liability. (Answer only Yes or No)

Activity 3: to be able to explain and apply the concept ownership interest

The term ownership interest refers to an interest of the owner in the assets of the business.

• • The owner provides the capital with which the business is started. This capital is employed mainly for the purchase of assets and the payment of liabilities and expenditure.
  • The creditors have first claim on the assets for the amounts owing to them. The owner then has a claim to what remains after the liabilities have been paid.
  • The following equation follows from this:
• Assets = Ownership interest + Liabilities or Assets – Liabilities = Ownership interest
• This is known as the accounting equation.

• Complete the following:

1. If the total assets amount to R10 000 and the total claims (debt) are R4 000, the ownership interest will be R__________

2. Which of the following represents the accounting equation? Underline the correct answer.

Assets + Ownership interest = Liabilities

Assets – Liabilities = Ownership interest

Assets + Liabilities = Ownership interest

3. Write down the information below in the form of the accounting equation. Use the amounts to indicate that the accounting equation always balances.

Equipment R 6 000 – _______

Creditors R 6 000 – ________

Cash R10 000 – __________

Debtors R 4 000 – __________

Furniture R 4 000 – ________

Ownership interest R18 000 – ________

Answer :

4. If any two elements of the accounting equation are known, the missing one can be calculated.

Complete the following:

A = O + L

(a) 1 800 = 800 +____________

(b) 650 = .__________ + 420

(c) 890 = 240 + .__________

1. _________ = 830 + 560

Assessment

Memorandum

ACTIVITY 1

Classification of Assets

FIXED ASSETS

CURRENT ASSETS

Land and Buildings

Trading Inventory

Equipment

Cash

Vehicles

Money in the bank

Recognition of Assets

1. Assets Computers

2. Assets Modern office building

3. Assets Delivery vehicles

4. No

5. No

6. No

7. No

8. Assets Building that is let

ACTIVITY 2

1. Creditors

2. No

3. No

ACTIVITY 3

1. R6 000 - (R10 000 – R4 000)

2. Assets – Liabilities = Ownership interest

3. Assets = O + L24 000 = 18 000 + 6 000

4. (a) 1 000

(b) 230

(c) 650

(d) 1 390