FAC_1502 Well Summarized.
2.4 Net asset value (2.3)
ASSETS – LIABILITIES = NET ASSET VALUE
EQUITY = NET ASSET VALUE
Assets:
Defined as a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
Item can be cla...
Defined as a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
Item can be classified as an asset only if it has been acquired by the entity as a result of past events.
Assets are therefore the possessions of the entity.
Assets can be classified as non-current when they:
Were not acquired for the main purpose of resale;
Are to be used in the business;
Have a lifespan of longer than twelve months.
Examples of non-current assets:
Land and buildings;
Furniture and equipment;
Vehicles;
Financial assets
Asset shall be classified as current when it satisfies any of the following criteria:
It is intended for sale or consumption in the entity’s normal operating cycle;
Held primarily for the purpose of being traded;
Expected to be realised within twelve months after the reporting period;
Cash or cash equivalent unless it is restricted from being exchanged for at least twelve
months after the reporting period.
Examples of current assets:
Inventories;
Trade and other receivables;
Bills receivable;
Cash at bank
Assets are to be listed in specific order on the statement of financial position. Firstly, non-current
assets are shown, followed by the current assets.
,Liabilities:
Liabilities are present obligations of the entity arising from past events.
For an item to be classified as a liability, an obligation towards another party must already exists.
Means there must be a present obligations. Obligation is a duty / responsibility to act / perform in a
certain way. Only past events / transactions can be recognised as liabilities. Future commitments
cannot be recognised until the entity has received an asset or until an irrevocable agreement has
been made.
Obligations are settled by:
Cash payments;
Means of the transfer of other assets;
Provision of services;
Any other specified performance.
Liabilities can be non-current or current
Non-current liabilities are long-term debts, settled after one year of the date of the statement of
financial position.
Example of non-current liabilities:
Long-term loans;
Mortgages;
Debentures.
Current liabilities are debts that have to be settled in the short-term, usually within a year of the date
of the statement of financial position.
Liability shall be classified as current when it satisfies any of the following criteria:
Expected to be settled in the entity’s normal operating cycle;
Held primarily for the purpose of being traded;
Due to be settled within twelve months after the reporting period;
Entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period.
All other liabilities shall be classified as non-current
Example of current liabilities:
Trade and other payables;
Bank overdrafts
Equity:
,Equity is the residual interest in the assets of the entity after deducting all its liabilities. Equity
represents the interest of the owners in the net assets of an entity, means part of the assets against
which there is no claim from other parties.
Equity of an entity can be obtained from two sources:
Contributions made by the owners;
Any net profit made.
Contributions by the owners are usually in the form of cash, owners may also contribute other
assets. Equity which the owners contribute toward the funding of a sole trader or partnership is
known as capital. In close corporations, known as members’ interests and in companies, known as
share capital. Equity is therefore the amount the entity owes to its owners.
Equity is not a claim against assets; it is what is left over after all liabilities are deducted from assets.
Equity = Assets – Liabilities
Written differently:
Assets = Equity + Liabilities
A = E+L
Equation is known as the basic accounting equation / BAE.
, 2.5 Application of the basic accounting equation (BAE) (2.5,
2.6)
Exercise 1:
A = E+L
E = A–L
E = R30 000 – R5000
E = R25 000
Exercise 2:
Assets: R100 000 + R40 000 + R10 000
Liabilities: R20 000
A = E+L
E = A–L
E = R (100 000 + 40 000 + 10 000) – R20 000
E = R130 000
Assets = what the entity owns
Equity and Liabilities = what the entity owes
What the entity owns = what the entity owes
Financial position of an entity is indicated by this equation.
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