Purpose of the Balance Sheet

The Balance Sheet, also known as the 'Statement of Financial Position', is a report that displays the following:

• Assets owned - What the business owns

• Liabilities owed - What the business owes to other parties

• Owner's Equity - What is leftover after deducting liabilities from assets. I.e. the value of the owners/shareholder's proportion of the business.

The classification of assets and liabilities allows report users to to evaluate:

1. Business stability;

2. Liquidity - the business's ability to meet obligations as they fall due;

3. Leverage/ Gearing - comparison of the business debt financing to equity financing.

Format of a Balance Sheet

The above Balance Sheet is an extract from JB HI-FI's 2020 Annual Report. It can be seen that the balance sheet consists of three sections: Assets, Liabilities and Equity.

Additionally, the Assets and Liabilities sections of the report are further divided into Current assets and Non-current assets, and Current liabilities and Non-current liabilities respectively. AASB 101 rules requires assets and liabilities to be classified as current and non-current, which will be discussed in detail below. Image sourced from JB HI FI 2020 Annual report.

Assets

Assets are grouped into 2 categories:

1. Current Assets: Items that are cash or will be converted to cash within a short period of time, or assets where their future benefit is expected to expire (to be consumed) within 12 months from the date of the balance sheet. Examples: Cash at bank, Cash on hand, Petty cash, Accounts receivable, Inventory, Supplies/ materials, GST Paid, Prepaid Expenses to be Used Within 12 Months.

2. Non-Current Assets: Items that will bring a future benefit to the business beyond 12 months from balance sheet date or will be consumed over a long period of time (for more than 12 months from the current date). Examples: Furniture and fittings, Premises, Land and building, Motor vehicle. Consolidations for Current Assets: In this unit, a specific set of classifications can only be used in the asset section of the balance sheet.

Below shows the line classifications that must be included under Current Assets: - examples of items that can be consolidated under each line are given in brackets.

• Cash and Cash equivalents (Cash on hand, petty cash, cash at bank, deposits at call, bank bills).

• Receivables (Accounts receivable less allowance for doubtful debts, interest receivable and accrued income).

• Inventories (stock)

• Other Current Assets

The total Current Asset is the sum of all the figures of the above line classifications in the balance sheet.

Consolidations for Non-Current Assets: Below shows the line classifications that must be included under Non-Current Assets: - examples of items that can be consolidated under each line are given in brackets.

Investments (Term deposits and Government bonds maturing after 12 months from the date on the balance sheet, shares in other companies)

• Property, Plant and Equipment (Note 1) (Land at revalued amount, Plant & Equipment at cost less accumulated depreciation, Buildings at cost less accumulated depreciation, motor vehicle at cost less accumulated depreciation)

• Other Intangible assets (Cost of patents, copyrights, trademarks)

• Goodwill The total non-current asset is the sum of all the figures of the above line classification in the balance sheet.

The final step is to calculate the total assets in this section which is the sum of both the total current assets and total non-current assets.

Liabilities

Liabilities are grouped into 2 categories on the basis of the urgency in which the debt has to be repaid.

1. Current Liabilities: Those debts that have to either be repaid or will be settled within 12 months of the current balance sheet date. Examples: Accounts payable, GST-collections, Bank overdraft, Bank loan (to be repaid within 12 months).

2. Non-Current Liabilities: Those debts that do not either have to be repaid or be settled within the next 12 months of the current balance sheet date. Examples: Bank loan and Mortgage loan (to be repaid after the period of the next 12 months).

Consolidations for Current Liabilities: In this unit, a specific set of classifications can only be used in the liabilities section of the balance sheet. Below shows the line classifications that must be included under Current Liabilities: - examples of items that can be consolidated under each line are given in brackets.

• Short-term Borrowings (Bank overdraft, loans (due to be repaid <12 months)).

• Payables (Accounts payable, Salaries payable, Accrued expenses).

• Income tax payable (or current tax liability).

• Other Current Liabilities (Unearned income, revenue received in advance).

• The total Current Liabilities is the sum of all the figures of the above line classifications in the balance sheet.

Consolidations for Non-Current Liabilities: Below shows the line classifications that must be included under Non-Current Liabilities: - examples of items that can be consolidated under each line are given in brackets.

• Long-term Borrowings (Loans (due to be repaid >12 months), Mortgage loans, Debentures, Unsecured notes).

The total Non-Current Liabilities is the sum of all the figures of the above line classification in the balance sheet. The final step is to calculate the Total Liabilities in this section which is the sum of both the total current liabilities and total non-current liabilities.

Equity

Equity is the difference between the assets and the liabilities of a business (Assets - Liabilities = Equity). The Equity of a business is made up of 6 categories:

1. Share capital: The total amount of capital the shareholders have contributed through the buying of shares issued by the business. This includes the sum of Preference shares and Ordinary Shares capital.

2. Reserves: The profits that the company has not distributed as dividends yet and remain in the balance sheet as Equity owing to the shareholders. This is divided into 3 accounts: - Retained Earnings: The profit after tax is transferred into this account, and dividends paid to shareholders are taken out of this account. This account also shows transfers to and from other reserves. The balance of the retained earnings account shows the profits not distributed to shareholders and that is retained in the business for future use. If the retained earnings account has a Credit balance, this represents a profit owing to shareholders. If the account has a Debit balance, this represents accumulated losses.

3. Revaluation Reserve: This account records gains (increases) in property, plant and equipment (e.g. Land) when they are revalued to their Fair Value. Gains can be transferred to retained earnings.

4. General Reserve: This account records profits transferred to or from the retained earnings account. It can be used in the future to pay dividends or to issue bonus shares. In this unit, a specific set of classifications can only be used in the liabilities section of the balance sheet. - Share Capital (Preference share capital, Ordinary share capital).

5. Other Components of Equity (Revaluation Reserve and General Reserve).

6. Retained Earnings.