The classified balance sheet uses sub-categories or classifications to further break down asset, liability, and equity categories. For example, in the balance sheet above, equipment and fixtures are listed together under assets in the amount of $17,200. On the classified balance sheet below, equipment and furniture are listed separately under a fixed asset category instead of just being listed as assets.
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 presents information about an entity’s assets, liabilities, and shareholders’ equity that is aggregated (or “classified”) into subcategories of accounts. It is extremely useful to include classifications, since information is then organized into a format that is more readable than a simple listing of all the accounts that comprise a balance sheet. 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. Like current assets, the current liabilities only have a life span of one accounting period, usually a year.
Classified Balance Sheet
Companies prefer to take on high levels of long-term debt for reasons including longer payback period, lower cost of debt and potential to raise larger amounts of capital. The internal capital structure policy/decisions of a company will determine how much of long-term debt is raised by a company. The one major downside of high debt levels in the accompanying higher levels of financial leverage which could severely amplify a company’s losses during an economic downturn. Cash flow statements, profit and loss statements, tax returns, and balance sheets are all different reports that break down your business’s finances for their own specific purposes. Designed to show what a business owns, what it owes, and what has been invested in the company, the balance sheet, like the income statement and statement of cash flow, is one of the three main financial statements.
- The Current Assets list includes all assets that have an expiration date of less than one year.
- As a business owner, you’re probably familiar with different financial statements and what they indicate about your business.
- The classifications used will vary depending on the type of business you own, and there is no one way to format a classified balance sheet properly.
- A classified balance sheet presents information about an entity’s assets, liabilities, and shareholders’ equity that is aggregated (or “classified”) into subcategories of accounts.
- Like your unclassified balance sheet, the totals of these classifications must follow the accounting equation, detailed below.
For example, rather than including one “assets” category, a classified balance sheet may break down assets into current and fixed assets. It may also separate assets that are normally added together, such as FF&E, into how much is tied specifically to furniture, specifically to fixtures, and specifically to equipment. Like your unclassified balance sheet, the totals of these classifications must follow the accounting equation, detailed below. These are short-term resources that are utilized within the operating period, usually a year.
Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. We follow ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Much of our research comes from leading organizations in the climate space, such as Project Drawdown and the International Energy Agency (IEA). If a company has surplus cash available and it sees a valuable investment opportunity in some other business, it can decide to buy a stake in it. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Classified balance sheets are a useful resource for your business
These are short term debt obligations that need to be paid back either by utilizing the current assets or by taking on new current or long-term liabilities. The detailed categorization of your business’s assets and liabilities in a classified balance sheet will help anyone viewing your balance sheet easily access the specific information they need. Smaller businesses typically use an unclassified balance sheet, but if you’re looking for a report that provides the same data in a more detailed format, you’ll want to prepare a classified balance sheet. A classified balance sheet is important because it provides a snapshot of a company’s financial position.
The classifications used will vary depending on the type of business you own, and there is no one way to format a classified balance sheet properly. The chart below lists common balance sheet classifications and examples of the balance sheet accounts that are included in each classification. The only difference between a classified and unclassified balance sheet is that a classified balance sheet “classifies” assets, liabilities, and equity into more specific categories. The unclassified balance sheet lists assets, liabilities, and equity in their respective categories. A classified balance sheet is a financial statement that reports the assets, liabilities, and equity of a company. It breaks each account into smaller sub-categories to provide more value for the user of this report.
In general, buyers interested in your business will also want to see the last three years of financials, so it’s important to understand how to prepare them before listing your business. Your business’s balance sheet is just one of many documents that will be requested when you decide to sell your business. If you’re selling your business, for example, it’s common for a buyer to use some sort of financing (usually through the SBA) to purchase your business. To further illustrate the difference between a balance sheet and a classified balance sheet, let’s compare the two in an example. If you’re not sure what a classified balance sheet is, you’re in the right place.
Module 9: Property, Plant, and Equipment
The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. If you’re ready to sell your business, or you’re just curious about the process, contact us today. Generally speaking, a classified balance sheet will be more useful in almost every scenario. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. It all depends on who generates the balance sheet, and who the target audience is. Our goal is to deliver the most understandable and comprehensive explanations of climate and finance topics.
First, you have to identify and enter your assets properly, assigning them to the correct categories. Both a classified and an unclassified balance sheet must adhere to this formula, no matter how simple or complex the balance sheet is. This simple equation does a lot in demonstrating that shareholders’ equity is the residual value of assets minus liabilities. Alternatively, equity can also be directly calculated as the combination of contributed capital (commons stock + preferred stock – treasury stock) and retained earnings (net income + other comprehensive income – dividends paid).
For instance, short-term securities held for sale will most likely be more than liquid than accounts receivable or inventory. However, overall, current asset items are still relatively more liquid in nature than fixed assets or intangible assets. Contrastingly, if you want a quick snapshot of your business’s performance, an unclassified balance sheet could be more easily digestible. The final section in your balance sheet, Owner’s Equity, is where you’ll place any stock values, retained earnings as well as any additional capital that you or any of your shareholders may have contributed to the business. A balance sheet is a financial statement that displays the total assets, liabilities, and equity of your business at a particular time.
The Fixed Assets category lists items such as land or a building, while assets that don’t fit into typical categories are placed in the Other Assets category. The classifications used can be unique to certain specialized industries, and so will not necessarily match the classifications shown here. Whatever system of classification is used should be applied on a consistent basis, so that balance sheet information is comparable over multiple reporting periods. Throughout this series of financial statements, you can download the Excel template below for free to see how Bob’s Donut Shoppe uses financial statements to evaluate the performance of his business. As a business owner, you’re probably familiar with different financial statements and what they indicate about your business.