BALANCE SHEET

PURPOSE
Accounting and Finance for Business:
Statement of Financial Position

Greg Jamieson
TOPIC INTENDED LEARNING OUTCOMES

 Explain the nature and purpose of the statement of financial

position.
 Describe and classify the key elements of a statement of
financial position.
 Describe and apply the double-entry bookkeeping system
and the balance sheet equation.
 Prepare a statement of financial position from a listing of
accounts.
 Calculate and interpret common statement of financial
position ratios.

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READING

 Hancock, P. et al, (2016), Accounting and Finance for

Business, (2nd edition), Cengage, pp 166.

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PURPOSE OF A BALANCE SHEET
WHAT IS A BALANCE SHEET?

 The Balance Sheet may be described as providing a

statement of the entity’s Assets, Liabilities and Equity, which
summarises the resources controlled by the entity and its
obligations due.

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PURPOSE OF A BALANCE SHEET
PURPOSE

 “The balance sheet may also be called the statement of

financial position.

 It is an accounting statement that is prepared at one point in

time, which shows all the resources controlled by the entity
and all the obligations due by the entity.”

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 BALANCE SHEET
ENTITY

An entity is …

“something that has a separate distinct existence and

objective or conceptual reality”

Example
It be an organisation that has an identity separate from
those of its members, such your local football club, or an
non-governmental organisation such as Oxfam. It could
also be a business, which has an identity distinct from that
of its shareholders.

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 BALANCE SHEET
RESOURCES

“resources controlled by the entity are the

assets of the entity”

ASSETS
Examples:
• inventory / stock
• Property, plant & equipment
• cash
• trades receivable (accounts receivable)

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 ASSETS: RESOURCES OF THE ENTITY
EXAMPLE: JB HI-FI RESOURCES
Cash
Trade
3%
Receivables Being a retailer it is not
8% surprising to see the main
resources controlled by JB
Hi-Fi Limited are
Intangible inventories or stock (TVs,
Assets
42%
Computers DVDs etc which
line its shelves) which
comprise 35% of the entity’s
Inventories assets. The Intangible assets
35%
are unusually high as JB Hi-
Fi acquired another
business, the Good Guys, in
2017.
PPE Other
8% 4%

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 BALANCE SHEET
OBLIGATIONS

“obligations due by the entity”

LIABILITIES & EQUITY

The obligations are typically divided into:
• Liabilities, which are obligations due to external providers
of funds, and
• Equity, which are obligations due to internal providers of
funds, being those provided by the owners of the entity, the
shareholders or members.

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 BALANCE SHEET
OBLIGATIONS

“obligations due by the entity”

LIABILITIES & EQUITY

Examples: Examples:
• tax liabilities • contributed capital
• trades payable (accounts payable) • retained earnings
• borrowings • reserves

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 LIABILITIES: OBLIGATIONS OF THE ENTITY
EXAMPLE: JB HI FI OBLIGATIONS
Being a retailer it is not
Trade
surprising to see the main
payables obligations due by JB Hi-Fi
26% Limited are trade payables
Equity
35%
(account payable), which is
the money JB Hi-Fi owes its
suppliers for goods it has
acquired on deferred terms.

Deferred The other major supplier of

Revenue funds are the shareholders of
10%
Tax
the company who have
Borrowings Other liabilities provided the “equity”, which
23% 5% 1% comprises 35% of JB Hi-Fi’s
funding

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 BALANCE SHEET
POINT IN TIME

“a point in time”

• The value of the Assets, Liabilities and Equity

change over time as new resources are acquired
and new obligations are entered into.

• Hence, the values reported in the Balance Sheet are

those values which occurred at A POINT IN TIME.

• While a balance sheet may be recorded at any point

in time, it is typically recorded at the end of the
financial year for the entity concerned.

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PURPOSE OF A BALANCE SHEET
MEASURES OF THE ENTITY’S POSITION

 The purpose of a balance sheet is to communicate

information about the financial position of an entity at a
particular point in time.

 In particular it provides information about the:

 Solvency of the entity, which describes the entity’s ability

to meet its long term financial obligations; and the
 Liquidity of the entity, which describes the entity’s ability
to meet its short term financial obligations.

(The entity’s solvency & liquidity can be measured through the use of
financial ratios to analyse the information presented in the balance sheet).
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 KEY
POINTS

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KEY POINTS
SUMMARY OF KEY POINTS

• The balance sheet is a statement, at one point in time,

which shows all the resources controlled by the entity and all
the obligations due by the entity.
• An entity is an organisation which has a distinct existence
separate from its members or owners.
• Resources controlled are defined as assets.
• Obligations due are defined as liabilities, if due to an
external party, and equity, if due to members/owners of
entity
• The value of assets, liabilities and equity is measured at a
point in time.
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YOU

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