Prepare a basic statement of financial position

Assets

Assets are resources owned by a business that have economic value and will benefit the business in the future. Assets are divided into two categories:

• Fixed assets: Long-term resources used for running the business, not for resale. Examples include buildings, motor vehicles, machinery, and furniture.
• Current assets: Short-term assets that are expected to be used or converted to cash within one year. Examples include stock (inventory), debtors (accounts receivable), cash in hand, and cash at bank.

Liabilities

Liabilities are debts or obligations owed by the business to outsiders. They are divided into:

• Long-term liabilities: Debts payable over more than one year. Example: a bank loan.
• Current liabilities: Debts payable within a short period (usually one year). Examples: creditors (accounts payable) and bank overdrafts.

Capital

Capital is the amount of money or value invested in the business by the owner. It represents the owner's claim against the business assets. Capital changes when the business makes profit or loss, and when the owner withdraws money or goods for personal use (drawings).

Other Important Terms

• Net profit: When revenue exceeds expenses (revenue > expenses).
• Net loss: When expenses exceed revenue (expenses > revenue).
• Drawings: Money or goods taken from the business by the owner for personal use.

The fundamental accounting equation that governs every balance sheet is:

$Assets = Capital + Liabilities$

This equation must always balance. If you know any two figures, you can calculate the third:

• $Capital = Assets - Liabilities$
• $Liabilities = Assets - Capital$

The statement is prepared in a table format with two sides. The left side shows liabilities and capital, while the right side shows assets.

Statement of Financial Position as at [Date]

Note: Total Liabilities + Capital must equal Total Assets.

Mwanaisha runs a small shop in Arusha. On 31 December 2023, her business had the following items:

• Building: TSh 5,000,000
• Motor vehicle: TSh 2,500,000
• Stock: TSh 1,200,000
• Debtors: TSh 800,000
• Cash in hand: TSh 300,000
• Cash at bank: TSh 1,500,000
• Creditors: TSh 1,400,000
• Bank loan (long-term): TSh 2,000,000
• Capital at 1 January 2023: TSh 5,000,000
• Net profit for the year: TSh 2,900,000
• Drawings during the year: TSh 500,000

Prepare the Statement of Financial Position as at 31 December 2023.

Solution

Statement of Financial Position as at 31 December 2023

Verification: Assets TSh 10,800,000 = Capital (TSh 7,400,000) + Liabilities (TSh 3,400,000) = TSh 10,800,000 ✓

1. Identify and list all assets from the records. Classify them as fixed or current assets.
2. Identify and list all liabilities from the records. Classify them as long-term or current liabilities.
3. Determine the capital by taking the opening capital, adding net profit (or subtracting net loss), and subtracting drawings.
4. Arrange the statement with liabilities and capital on the left side and assets on the right side.
5. Total each side and verify that both sides are equal. If they are not equal, check for errors.

In Tanzania, small business owners like market vendors in Kariakoo or shop keepers in Mwanza can use a statement of financial position to track whether their business is growing or facing problems. For example, if a restaurant owner in Dar es Salaam sees that their liabilities (money owed to suppliers) are growing faster than their assets (cash, food stock, furniture), they know they need to act quickly—such as collecting unpaid bills from customers or reducing stock—to avoid running out of money.