Under the Corporations Law and AASB 101 Presentation of Financial Statements, any business organisation that is a reporting entity must include the following items in its general-purpose financial reports:

• the director's report
• the director's statement
• a balance sheet (statement of financial position)
• an income statement (statement of financial performance or profit and loss statement)
• a statement of changes in equity
• a cash flow statement
• explanatory notes for the above four statements that summarise the specific accounting
• policies used to prepare them and disclose any other information that either is required by Australian accounting standards or will assist in understanding the statements the auditor's report.

Under AAS 27, AAS 29 and AAS 31, every local government, State government, Federal government and government department is defined as a reporting entity and must include the following items in its general-purpose financial reports:

• a balance sheet (statement of financial position)
• an income statement (operating statement or statement of financial performance)
• a statement of changes in equity
• a cash flow statement
• explanatory notes for the above four statements that summarise the specific accounting
• policies used to prepare them and disclose any other information that is either required by Australian accounting standards or will assist in understanding the statements.

The role of financial statements is to communicate information about an organisation's finances to interested parties to assist them in their decision making. Most interested parties
will be external parties not involved in the operations of the organisation. Financial statements are sometimes used internally within an organisation to provide managers and owners with information about its finances.

The financial position of an organisation at any point in time is determined by the balance between the economic resources it owns at that point (its assets) and the economic resources it has used to purchase these assets (liabilities and owner's equity).

The balance sheet purports to show an organisation's assets, liabilities and owner's equity at a given moment in time. It is sometimes referred to in Australia as
a statement of financial position.

The income statement reports the results of operating an organisation for a designated period. It shows owners and interested external parties how well the organisation has
performed by reporting the:

• sources of income
• cost of goods and services provided during the period
• capital injection required to sustain operations
• net profit or loss.

The income statement is sometimes referred to in Australia as the statement of financial performance, profit and loss statement or operating statement.

The final financial statement we will review is the cash flow statement. The purpose of this statement is to provide information about the size and nature of an organisation's cash inflows and outflows. By analysing the statement of cash flows it can be determined whether or not an organisation is generating cash—that is, cash in excess of its needs. This can be important information because even if an organisation is generating profit it may still face problems if it cannot generate cash.

Even though not all costs are incurred during the same accounting period as the associated income, the matching process of the accrual accounting method requires that they be recorded as an expense during the same accounting period as that income, regardless of the actual timing of the cost outlay. This requirement raises several complexities with regards to financial statements, so before financial statements are prepared, final adjusting entries are recorded to update (adjust) an organisation's accounting records. These entries are variously known as balance day adjustments, end of period adjustments or end of year adjustments. They enable a better matching of income against expenses on the income statement, and a more accurate presentation of monetary items on the balance sheet.

Adjusting entries are required for five major types of transactions:

• income owed to the organisation by other parties for goods or services purchased on credit - this is divided into debtors and bad debts
• expenses owed by the organisation to other parties for goods or services purchased on credit - these are divided into creditors and accruals
• prepayments made by the organisation to other parties for benefits to be received in the future such as rent
• prepayments made to the organisation by other parties for benefits to be received in the future depreciation of non-current assets.

Companies are generally required to pay tax on their income. Under AASB 112 Income Taxes, the amount of income tax expense reported must be that attributable to the transactions in the income statement. However, profit for accounting purposes and taxable income for income tax purposes may not be the same due to differences in the treatment of certain items of income and expenditure. The tax consequences of most events that affect taxable income for the year are recognised in a company's financial statements as either current tax liabilities or current tax assets.

Under IAS 27 / AASB 127 Consolidated and Separate Financial Statements, wherever companies are operating in a parent-subsidiary relationship they are considered to comprise an economic entity or group for which a set of consolidated financial statements must be prepared by the chief parent entity. These financial statements must show, in aggregated form, the overall profit or loss and financial position of the group. Under AAS 31 Financial Reporting by Governments, Federal and State governments are also required to produce consolidated accounts that disclose in aggregate their incomes, expenses, assets, liabilities and equity.

When one company acquires another, the price paid by the parent company is expected to reflect the fair value of equity it acquires in the subsidiary. However, if the price paid is greater than the value of the equity acquired, the difference is reported as an asset called goodwill. If the price paid is less than the value of the equity acquired, the difference is reported as a liability called a discount. These two items will be shown as a net value in the consolidated balance sheet. In the past, when goodwill arose from the acquisition of an interest in a subsidiary it could be written off over a period of up to 20 years. However the accounting standard AASB 3 Business Combinations introduced in 2005 prohibits this practice and instead requires organisations to record the acquisition of goodwill and any decline in its value at the time it occurs.

Every company has three options as to how to use its net profits: it may appropriate them, it may transfer them to a reserve fund or it may distribute them to shareholders as dividends. Each of these options must be treated carefully in consolidated accounts.

If a company acquires a subsidiary that has general reserves or appropriation funds at the date of acquisition, these are regarded as capitalised and so are not available for distribution to shareholders. If a parent company acquires 100% ownership of a subsidiary, both the parent company and the subsidiary are entitled to pay dividends. If the subsidiary company declares a dividend, it will be paid to its parent company as its only shareholder. As this is an internal transaction it will be eliminated when the consolidated accounts are prepared. If the parent company declares a dividend for its shareholders, this will continue to be reflected in the consolidated accounts because it is paid externally. If it has been declared but not yet paid when the consolidated accounts are prepared it will appear as a current liability in the group balance sheet because it will reduce the group's assets when finally paid.