What Is A Classified Balance Sheet? Explained

Currently working as a consultant within the financial services sector, Paul is the CEO and chief federal tax credits for consumer energy efficiency editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.

Which Business Should Use Classified Balance Sheet?

This type of analysis wouldn’t be possible with a traditional balance sheet that isn’t classified into current and long-term categories. A classified balance sheet arranges the amounts from a company’s balance sheet accounts into a format that is useful for the readers. For instance, the reader can easily calculate the company’s working capital since the classified balance sheet shows the total amount of the company’s current assets and the total amount of its current liabilities. A classified balance sheet format provides a crisp and crystal clear view to the reader.

Format

This type of balance sheet segregates the assets, liabilities, and equity into classifications or categories, thus presenting a more detailed and clear picture of a company’s financial capitalized cost definition condition. This in-depth information is pivotal in driving investment decisions, strategic planning, and performance evaluation. A classified balance sheet helps organize and categorize a company’s financial information into relevant sections, providing a clearer picture of its financial position and aiding in financial analysis. For example, an investor interested in the day-to-day operations and profitability of the firm would like to calculate the current ratio. He would have to deep dive into every section in a normal balance sheet and read notes specifically for each asset and liability. However, in a classified balance sheet format, such a calculation would be straightforward as the management has specifically mentioned its currents assets and liabilities.

Shareholder’s Equity

However, a classified balance sheet is detail-oriented, polished, and audited. Most of the time, the classified balance sheet has accompanying notes to report details of all items. Most of the leverage ratios, liquidity ratios, and return on investments are calculated by the balance sheet data. In that case, the time is saved in ratio analysis due to accurate and precise classifications. Current are the possessions of a company that can be liquidated within 12 months.

When information is aggregated in this manner, a balance sheet user may find that useful information can be extracted more readily than would be the case if an overwhelming number of line items were presented. Current liabilities like current assets are assumed to have a life of the current fiscal year or the current operating cycle. They are mainly short debt expected to be paid back using current assets or by forming a new current liability. The critical point is they have to be settled fast and are not kept for later payments. Examples of current liabilities include accounts payable, accrued liabilities, current portion of long term debt (CPLTD), deferred revenue, etc. A classified balance sheet lists the standard contents of a normal balance sheet, which include the assets, liabilities and the value of the equity but there are further classifications or categories of each.

Real-world classified balance sheets can be much more complex and include many more line items, especially for large corporations. The equity section represents the owners’ interest in the business and typically includes common stock, retained earnings, and treasury stock. Similarly, liabilities are categorized into current and non-current or long-term liabilities.

Liabilities Section

It is a more detailed approach, whereby the business will organize the data in such a manner so that more specific and detailed information is available to whoever tries to analyse or read it. 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.

Common stock, additional paid-in capital, treasury stock, and retained earnings are listed for corporations. Partnerships list member capital accounts, contributions, distributions, and earnings for the period. Current liabilities include all debts that will become due in the current period. In other words, this is the amount of principle that is required to be repaid in the next 12 months. The most common current liabilities are accounts payable and accrued expenses.

The same principle holds for the Liabilities section, where you’ll list all current liabilities, as well as those that are long term, such as mortgages and other loans. The long-term section lists the obligations that are not due in the next 12 months. Keep in mind a portion of these long-term notes will be due in the next 12 months. 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. 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. Also, fixed assets are depreciated and intangibles are amortized over their useful lives, so the balance also shows investors the book value of each section. Let us understand the concept of sample classified balance sheet with the help of some suitable examples. Let’s walk through each one of these sections and answer the question what is a classified balance sheet. However, if a balance sheet is scattered information, you cannot extract the required information. Retained earnings signify the leftover earnings after a company has paid its expenses and dividends to the shareholders.

1. Fair disclosure is also one of the benefits offered by a classified balance sheet.
2. Like your unclassified balance sheet, the totals of these classifications must follow the accounting equation, detailed below.
3. This type of analysis wouldn’t be possible with a traditional balance sheet that isn’t classified into current and long-term categories.
4. Common stock, additional paid-in capital, treasury stock, and retained earnings are listed for corporations.
5. 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.

Although balance sheets are prepared they are read by normal investors who might not have an accounting background. The different subcategories help an investor understand the importance of a particular entry in the balance sheet and why it has been placed there. It also helps investors in their financial analysis and makes suitable decisions for their investments. 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.

These detailed balance sheets can be prepared in both formats of reporting, either IFRS or GAAP US. 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. Therefore, it is recommended that companies should use classified balance sheets to facilitate the users of their financial statements. Classifying assets and liabilities as current or non-current helps assess the company’s short-term and long-term financial health.

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. 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.

It groups or ‘classifies’ assets, liabilities, and equity into several subcategories, making it easier for stakeholders to analyze and interpret the data. While some of the differences between unclassified and classified balance sheets are in the formatting, classified balance sheets are designed to display details. A classified balance sheet displays details about a business’s assets, liabilities, and shareholders’ equity divided into account subdivisions.

A well-represented and well-classified information instills confidence and trust in the creditors and investors. It conveys a strong message to the investors that their money is safe as management is serious about the business’s profitability and running it ethically and within the rules of the land. It also tells a lot about management, who wants to be open about their assets and valuations and how these valuations have been calculated. Publishing a classified balance sheet also makes it easy for regulators to point out an issue in the initial stages rather than in the final stages when irrevocable damage has already been done. Such details in the classified balance sheet format help in getting a good breakup of the assets, liabilities and equity related information and understand the cash flow situation well. However, it is mandatory to prepare and disclose the financial statements for public limited companies.