Chapter 2

ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-)

Indicate the effect (+ and -) on the accounting equation of the following transactions: 1) Owner contributes R as capital cash. 2) Purchase inventory for R2 000 cash. 3) Pay rent expense R5 000 cash. 4) Obtain loan from Bank for R ) Pay water & electricity R1 000 cash.

Owner contributes R cash as capital ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-) + R =+ R (Bank) (Capital)

Purchase inventory for R2 000 cash. ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-) - R2 000 (bank) + R2 000 (inventory)

Pay rent expense R5 000 cash ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-) - R5 000 =- R5 000 (Bank) (Rent expense)

Obtain loan from Bank for R ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-) + R = +R (Bank) (Loan)

Pay water & electricity R1 000 cash ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-) - R1 000 =- R1 000 (Bank) (Water and electricity expense)

- Resource, - controlled by the entity, - as a result of past events, - from which future economic benefits are expected to flow to the enterprise.

Resource - Item is employed in economic activity - Item is used in the generation of income for the business - Example: buildings, vehicles, inventory

Controlled by the entity - Control = ability to direct the use of an asset as well as to receive the economic benefits associated with the asset - Right of ownership/right to claim/right of use - Must link to past event – when and how did the entity obtain control

As a result of past events - Example: purchase asset (example vehicle) for cash or on credit, or sell inventory for cash or credit - Risk and rewards of ownership have transferred, or - The entity has a right to claim in respect of trade receivable (the above results in control)

Future economic benefits are expected to flow to the entity - Asset contributes directly or indirectly to the inflow of cash to the entity, - Example: Use factory building to manufacture products that will be sold, - Future economic benefits – we are going to use the asset to generate cash

Future economic benefits are expected to flow to the entity Example What if we have sold inventory to a debtor, and we expect that he will NOT pay us (i.e. future economic benefits are not expected to flow to the entity)?

- Present obligation of the entity, - arising from past events, - of which the settlement (future) is expected to result in an outflow of resources embodying economic benefits.

Present obligation of the entity, - A responsibility to pay already exists now (but the entity has agreed to pay it in the future), - Legal obligation: enforceable in accordance with a contract, - Ex: purchase vehicle on credit

arising from past events, - transaction incurred by the entity together with the delivery of the service/product purchased - example: when purchasing vehicle on credit, the risks and rewards of ownership must have transferred,

arising from past events, Example: ABC Ltd orders a delivery vehicle on credit from Toyota on 5 March for R The contract is signed on 15 March and the vehicle is delivered to ABC Ltd on 25 March. On which day should the liability for the purchase be recognised? (5/15/25 March)

arising from past events, Example: Look at the definition of a liability. By which date is the definition of a liability met?

of which the settlement (future) is expected to result in an outflow of resources embodying economic benefits - i.e. it will result in an outflow of cash - NB! The outflow is expected to happen

of which the settlement (future) is expected to result in an outflow of resources embodying economic benefits Example ABC ltd gets sued by an angry customer who claims that their product caused her harm. ABC Ltd’s lawyers advise that the case will not succeed and no damages will be paid. Is the definition of a liability met?

of which the settlement (future) is expected to result in an outflow of resources embodying economic benefits Example ABC ltd was sued by an angry customer who claims that their product caused her harm. The court found ABC ltd guilty and ruled that R damages must be paid. Is the definition of a liability met?

ASSETS = EQUITY + LIABILITIES INCOME (+) EXPENSES (-)

EQUITY = Capital + Retained earnings (profits accumulated) - Drawings/Dividends PROFIT = Income – Expenses

FINANCIAL POSITION VS FINANCIAL PERFORMANCE

EQUITY = ASSETS - LIABILITIES Equity is the residual interest of the owners in the assets of the entity after deducting all the liabilities of the entity.

EQUITY = Capital + Retained earnings (profits accumulated) - Drawings/Dividends PROFIT = Income – Expenses

- Increase in economic benefits during the accounting period, - in the form of an increase in assets (or decrease in liabilities), - that result in an increase in equity, - excluding increases related to contributions by equity participants

Examples of income: - Sales of inventory - Rent income - Interest or dividend income - Sales of non-current assets for a profit - Income from delivery of services

- Decrease in economic benefits during the accounting period, - in the form of an outflow or decrease in assets OR incurrence or increase in liabilities, - that result in a decrease in equity, - excluding decreases related to distributions to equity participants

Examples - Water and electricity - Salaries - Depreciation - Bad debt/doubtful debt

Examples Discuss whether the following items are expenses or not: (i) Dividend paid to shareholders, (ii) Interest paid on loan

- Recognition criteria of elements (p. 31 – p.34) - Accrual basis of accounting (p. 15) - Going concern (p. 15)