Preparation of Basic Statements of Financial Position (Balance Sheet)

### Topic 5: Preparation of Basic Statements of Financial Position (Balance Sheet) (BK-F1-05)
**Allocated Periods: 10**

#### 1. Meaning and Role of the Statement of Financial Position
- **Definition**: A snapshot financial statement showing the financial position of a business—its assets, liabilities, and owner's equity—at a specific point in time (e.g., as at 31 December 2026).
- **Core Formula**:
$$\text{Total Assets} - \text{Total Liabilities} = \text{Owner's Equity (Capital)}$$
$$\text{Net Assets} = \text{Capital Employed}$$

#### 2. Classification of Items
1. **Non-Current Assets**:
- Long-term resources acquired for permanent retention in the business to generate revenue, not for resale (Land, Buildings, Motor Vehicles, Fixtures & Fittings, Machinery).
2. **Current Assets**:
- Short-term assets expected to be converted to cash or consumed within one operating cycle / 12 months (Closing Inventory, Trade Receivables/Debtors, Prepaid Expenses, Cash at Bank, Cash in Hand).
3. **Current Liabilities**:
- Short-term obligations to be settled within one year (Trade Payables/Creditors, Accrued Expenses, Bank Overdraft).
4. **Working Capital (Net Current Assets)**:
$$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$$
- Measures short-term liquidity and operational solvency.
5. **Non-Current Liabilities**:
- Long-term borrowings maturing after more than one year (Bank Loans, Mortgages).
6. **Owner's Equity / Capital Section**:
$$\text{Closing Capital} = \text{Opening Capital} + \text{Net Profit} - \text{Drawings}$$

#### 3. Standard Vertical Format of the Statement of Financial Position
```
[Business Name]
Statement of Financial Position as at [Date]
TZS TZS
NON-CURRENT ASSETS
Land and Buildings XX,XXX
Plant and Machinery XX,XXX
Motor Vehicles XX,XXX
Fixtures and Fittings XX,XXX
TOTAL NON-CURRENT ASSETS XXX,XXX

CURRENT ASSETS
Closing Inventory XX,XXX
Trade Receivables (Debtors) XX,XXX
Cash at Bank XX,XXX
Cash in Hand X,XXX
Total Current Assets XXX,XXX

Less: CURRENT LIABILITIES
Trade Payables (Creditors) (XX,XXX)
Bank Overdraft (X,XXX)
Total Current Liabilities (XX,XXX)
NET CURRENT ASSETS (WORKING CAPITAL) XX,XXX
TOTAL ASSETS LESS CURRENT LIABILITIES XXX,XXX

Less: NON-CURRENT LIABILITIES
Long-term Bank Loan (XX,XXX)
NET ASSETS XXX,XXX

FINANCED BY (CAPITAL EMPLOYED):
Opening Capital XXX,XXX
Add: Net Profit for the year XX,XXX
XXX,XXX
Less: Drawings (XX,XXX)
CLOSING CAPITAL XXX,XXX
```

#### 4. Order of Presentation
- **Order of Permanence**: Items listed from least liquid to most liquid (Land $\rightarrow$ Buildings $\rightarrow$ Machinery $\rightarrow$ Vehicles $\rightarrow$ Inventory $\rightarrow$ Debtors $\rightarrow$ Bank $\rightarrow$ Cash). Standard in Tanzania and UK practice.
- **Order of Liquidity**: Items listed from most liquid to least liquid (Cash $\rightarrow$ Bank $\rightarrow$ Debtors $\rightarrow$ Inventory $\rightarrow$ Vehicles $\rightarrow$ Land).