A company’s financial statements tell about a company’s financial health and position for different fiscal years. A balance sheet, often regarded as a financial position statement, is one of the most important financial statements. The balance sheet is based on the accounting equation. The accounting equation states that:
Assets = Liabilities + Shareholder’s Equity
A balance sheet is categorized into different types based on the format and reporting. Based on the format, there are four types of balance sheets. These types are:
- Classified Balance Sheet
- Common Size Balance Sheet
- Comparative Balance Sheet
- Vertical Balance Sheet
Based on the reporting, there are two accounting standards as underlined by IFRS and GAAP US.
Whichever type of balance sheet is adopted by a business or individual, the usefulness of the balance sheet for financial analysis is undeniable. The classified balance sheet is the most commonly used type of balance sheet.
This article will walk through a classified balance sheet format, benefits of the classified balance sheet, formating, and general classifications included.
Classified Balance Sheet
What is a classified balance sheet?
A classified balance sheet can be defined as,
It is the format of reporting a company’s or business’s assets and liabilities. In a classified balance sheet, the assets, liabilities, and shareholder’s equity is segregated or categorized into sub-classes. Each classification is organized in a format that can be easily understood by a reader.
The purpose of the classified balance sheet is to facilitate the users of financial statements. Since the balance sheet is the most used financial statement for analyzing a business’s financial health, it should be reported and presented in an easily accessible form.
A classified balance sheet reader can extract the exact information needed without getting overwhelmed or distracted by sophisticated information. To sum up, a classified balance sheet aims to report the company’s assets and liabilities in as detailed a manner as possible.
Common Classifications In Balance Sheet
Here is the list of detailed classifications most of the classified balance sheet contains.
Assets
The asset is anything owned by a business or individuals. In the classified balance sheet, assets are further sub-classified into current and non-current assets.
Current Assets
Current are the possessions of a company that can be liquidated within 12 months. Some of the current assets have very high liquidity and can be used as a substitute for cash. The current assets are called short-term assets.
Under the current assets, further sub-categories are defined. These sub-categories include but are not limited to:
Cash and Cash Equivalents: Cash corresponds to cash at bank or cash in hand. Cash equivalents are short-term certificates that can be alternatively used as money.
Marketable Securities: Marketable securities are bonds and shares traded in the open market bought by the business. These are also liquid and can be converted into cash within a short time.
Account Receivables: Money that is owed to a business by its debtors or customers
Prepaid Expenses: Any advance expense paid and it does not recognize as expenses yet.
Inventory Held For Sale: Stock and inventory held for sale purposes, raw material used in manufacturing, etc.
Long Term Investments
Long-term investments are the assets of the company that cannot be liquidated within 12 months. These investments can be long-term debt securities, equity shares, or real estate properties.
Fixed Assets
Fixed assets are the physical assets of a company. These assets are also called tangible assets. These assets have further categories of:
- Land
- Building
- Property & Plant
- Equipment
- Machinery
Intangible Assets
Intangible assets are valuable assets of a business that do not possess physical shape or form. The most common examples of intangible assets are intellectual property like patents, copyrights, trademarks, or Goodwill.
Liabilities
Liabilities are the due obligations of a business. These are further categorized into current and non-current liabilities. Each category has further sub-classes and items.
Current Liabilities
Current liabilities are the liabilities that are due within 12 months. These are also called short-term liabilities.
The most common examples of current liabilities include:
- Line of credit, bank loan
- Short-term loan
- The current part of the long-term loan
- Outstanding expenses and wages
- Outstanding interest
- The dividend that is payable and due
Non-Current Liabilities
Non-current liabilities are long-term liabilities, and they are extended over many years.
Non-current liabilities have the following items:
- The long-term loan that can be bonds issued for 5 years, 10 years or long term bank loan
- Pension fund
- Deferred tax liability
Shareholder’s equity is the net worth of a business. It corresponds to the amount paid to the shareholders if a company is liquidated and all assets are sold out.
Share capital is the capital raised by a business to fund the business activities. It further includes initial paid-up capital and additional paid-up capital.
Retained Earnings
Retained earnings signify the leftover earnings after a company has paid its expenses and dividends to the shareholders.
Format Of Classified Balance Sheet
Here is a classified balance sheet format and most of the items such a balance sheet contains.ASSETS Amount (USD) LIABILITIES AND SHAREHOLDER’S EQUITY Amount(USD) Current Assets Current liabilities Cash & bank Current Portion Of Long-Term Debt Marketable Securities Bank Indebtedness Accounts receivable Outstanding Interest Finished goods inventory Outstanding Expenses Equipment spare part inventory Unearned Revenues Raw material inventory Dividend Payable Pre-paid building rent Account Payable Total Current Assets Total Current Liabilities Fixed Assets Long-Term Liabilities Machinery & equipment Long-term loan Land & Building Deferred Tax Liability Furniture & fixtures Pension Fund Liability Office equipment Total Long-Term Liabilities Total Fixed Assets Shareholder’s Equity Intangible Assets Paid-up capital Goodwill Retained Earnings Patents Total Equity Copyrights, Trademark TOTAL ASSETS TOTAL CAPITAL AND LIABILITIES
Which Business Should Use Classified Balance Sheet?
Small businesses and sole proprietorship do not have a condition of publishing their financial statements. However, there is a condition of preparing and publishing financial statements in partnerships and companies to make the financial position clear.
However, it is mandatory to prepare and disclose the financial statements for public limited companies. A classified balance sheet presents an obvious picture of financial health.
Moreover, it organizes the information in an easily accessible way. Therefore, it is recommended that companies should use classified balance sheets to facilitate the users of their financial statements.
Benefits Of Classified Balance Sheet
There are many benefits of using a classified balance sheet over a simple one.
Detailed Analysis of All Items
You can get the required information at the first glimpse. However, if a balance sheet is scattered information, you cannot extract the required information.
Besides, it is also hard to identify different items relating to varying classifications. For example, you can take totals of current assets and current liabilities in the classified balance sheet to calculate the current ratio.
Easy To Perform Ratio Analysis
The data reported in the balance sheet is used by different users in different ways. However, the biggest use of the data is for financial ratio analysis.
Most of the leverage ratios, liquidity ratios, and return on investments are calculated by the balance sheet data. For example, suppose a company uses the classified balance sheet. In that case, the time is saved in ratio analysis due to accurate and precise classifications.
Increase Trust of Creditors And Investors
The classified balance sheet is the most detailed among all types of balance sheets. When a detailed balance sheet with up-to-date information about the business’s financial position is published, it increases the trust of investors and creditors. The creditors and investors have all the required information to decide about investment or issuing loans.
Fair Disclosure
Fair disclosure is also one of the benefits offered by a classified balance sheet. In any balance sheet, it is possible to misrepresent information or misstate the facts.
However, it is potentially impossible in a classified balance sheet. From the tax payable to cash available, all information is presented.
Classified Balance Sheet Vs. Common Balance Sheet
What is the difference between a classified balance sheet Vs. Common Balance Sheet?
The biggest difference between the two types of balance sheets is:
Amount of details
A common balance sheet or unclassified balance sheet is like a trial balance. It is usually prepared for internal reporting purposes.
An unclassified balance sheet does not have sub-totals, clearly defined categories, and accompanying notes.
However, a classified balance sheet is detail-oriented, polished, and audited. Each category is clearly defined with sub-totals and items. Most of the time, the classified balance sheet has accompanying notes to report details of all items.
In other words, a classified balance sheet is a finished product. In contrast, an unclassified balance sheet is just the starting point.
Final Words
Classified balance sheets are more often used in corporate financial reporting whereas. Small businesses prepare unclassified balance sheets. These detailed balance sheets can be prepared in both formats of reporting, either IFRS or GAAP US.
However, decreasing order of liquidity will be used in GAAP US, and increasing order of liquidity is used in IFRS format.
Reviewed by Sinra
