Accounting Business Reporting for Decision Making

182 Accounting: Business Reporting for Decision Making

JB Hi-Fi Ltd is typical of that for a large entity. Not dissimilar to a smaller entity, the equity of a com-

pany is categorised into three components on its balance sheet:

• share capital (contributed equity)


• retained earnings (retained profits)


• reserves.

Figure 5.11 provides an extract of the equity section from the JB Hi-Fi Ltd 2015 balance sheet.

JB Hi-Fi Ltd

Balance sheet (extract) as at 30 June 2015

Consolidated

Note

2015

$’000

2014

$’000

Equity

Contributed equity

Reserves

Retained earnings

21

22

56 521

17 636

269 322

58 383

16 265

219 985

Total equity 343 479 294 633

F I G U R E 5 .11 Extract of JB Hi-Fi Ltd 2015 balance sheet — equity section

Source: Information from JB Hi-Fi Ltd 2015, preliminary final report, p. 58.

Share capital

Share capital (also called issued capital or contributed equity) refers to the capital contributions to the

entity made by the owners of the entity. For large entities such as JB Hi-Fi Ltd, the capital is contributed

as a result of shareholders paying money to the company in return for the company issuing them shares.

Hence, it is usually given the term ‘paid-up share capital’. When shares are subsequently transacted

in the market, the capital of the company does not change — the company receives no money from this

transaction because the transaction involves the exchange of shares that are already on issue between

investors. An entity’s share capital changes when the company makes a new issue of shares through a

public or private issue or via employee share plans. For entities that are not companies, such as ATC,

capital usually takes the form of a cash injection and is referred to as contributed capital. However, a

contribution of capital does not necessarily have to take the form of cash. Entities may receive a capital

contribution in the form of plant and equipment. For example, when establishing a company, the vendor

might contribute a property to the business in exchange for shares, or an individual starting their own

business may contribute equipment. JB Hi-Fi  Ltd’s notes to the accounts detail the movement in the

contributed equity during the reporting period. Note 21 details the number and dollar value of shares on

issue at the start of the reporting period, issued during the year, repurchased by JB Hi-Fi Ltd during the

year and on issue at the end of the reporting period.

Retained earnings

Retained earnings (also called retained profits or unappropriated profits) represent the sum of the entity’s

undistributed profits, being the profits the entity has generated since its inception that have not been

distributed in the form of dividends or transferred to reserve accounts. Consider the following. Owners

contribute $100 000 to commence a business. During the first year of operations, the entity reports a loss

of $40 000. In year 2, a profit of $10 000 is recorded, increasing to $50 000 in year 3. Year 4’s profits are

$80 000, and a $20 000 dividend is distributed to the owners. A $110 000 profit is reported in year 5, and

the entity increases the dividend to $30 000 and transfers $20 000 to a general reserve account. Table 5.1

shows the balance that would appear in the retained earnings as at the end of the reporting period. At the

end of year 5, the retained earnings are $140 000, comprising the sum of the five years of profits, being

$210 000 (–$40 000 + $10 000 + $50 000 + $80 000 + $110 000) less the $50 000 dividends distributed

over this time, less the $20 000 transfer to the general reserve account.