Accounting Business Reporting for Decision Making

CHAPTER 5 Balance sheet 159

purpose financial statements can be required to prepare the statements using full IFRS or IFRS with

reduced disclosure requirements. The entities required to prepare general purpose financial statements

that comply with full IFRS are for-profit private sector entities that have public accountability and the

Australian government and state, territory and local governments. JB Hi-Fi Ltd, being an entity with

public accountability, is required to prepare general purpose financial statements using full IFRS. Uni-

versities are also deemed to have public accountability and must prepare general purpose financial state-

ments using full IFRS. Entities that may prepare general purpose financial statements using the reduced

disclosure requirements rather than full IFRS include all for-profit private sector entities that do not have

public accountability, and all not-for-profit private sector entities. New Zealand’s approach is similar to

Australia’s approach. New Zealand is implementing a multi-standard framework, where the standards to

be applied depend on the nature and classification of the entity. Entities with public accountability are

required to comply with IFRS and some entities can use IFRS but with reduced disclosures. For not-

for-profit entities, New Zealand is implementing ‘simple format reporting standards’ based on accrual

accounting (similar to IPSAS) or cash accounting.

5.2 Nature and purpose of the balance sheet

LEARNING OBJECTIVE 5.2 Explain the nature and purpose of the balance sheet.

A primary objective of a for-profit entity is the generation of profits and a strong financial performance.

A not-for-profit entity’s objective may be the provision of services to a community. To generate profits,

or to provide services, entities need to invest in productive assets. Assets are items controlled by an

entity that provide the entity with future economic benefits. Value creation can also occur if the assets in

which an entity invests appreciate in value. Decisions concerning the acquisition and sale of assets are

referred to as investing decisions. The acquisition of assets requires financing, which may be provided

by external parties (e.g. lenders) and/or internal parties (e.g. the owners). The external claims on the

entity’s assets are termed liabilities. Interest-bearing debt is a category of liability. The internal claims

on the entity’s assets are referred to as equity. The mix of debt and equity financing an entity chooses

reflects its financing decisions.

The balance sheet (also known as the statement of financial position) is a financial statement

that details the entity’s assets, liabilities and equity as at a particular point in time — the end of the

reporting period. For example, entities with financial years ending on 30 June produce a balance sheet

as at 30 June each year. Note that a balance sheet can be prepared more frequently than on an annual

basis — indeed, it can be prepared as at any date. However, common practice is to prepare the balance

sheet semi-annually or annually as at the end of the reporting period.

The end of an entity’s reporting period often, but not necessarily, coincides with the end of the

financial year. This aligns the accounting period with the taxation period. For example, JB Hi-Fi Ltd’s

reporting period ends on 30 June. However, the end of the reporting period can be a date other than the

end of the financial year. For example, Coca-Cola Amatil’s year-end aligns with the end of the calendar

year — 31 December — and Westpac Banking Corporation’s year-end is 30 September.

The balance sheet is a financial statement that documents:

• what the entity owns (or controls) as at a particular date — the assets


• the external claims on the entity’s assets — the liabilities


• the internal claim on the entity’s assets — the equity.

Recall from chapter 4 that the accounting equation specifies that the entity’s assets equal the sum of

the entity’s liabilities and equity. The duality system of recording business transactions means that the

business transactions have a dual effect on the accounting equation such that the equation remains in

balance after the recording of each transaction. This is why a balance sheet, prepared as at any point in

time, will always balance.

An example of a balance sheet for ATC, a small business, was shown in illustrative example 4.5 in

chapter 4. The balance sheet for this tennis coaching business is reproduced as illustrative example 5.1.