A balance sheet is a financial statement that includes account balances from accounting systems. It classifies those balances under three categories, assets, liabilities, and equity. Primarily, it follows the accounting equation. This equation states the total of assets should equal the total of liabilities and equity. Therefore, the balance sheet presents those balances to show the requirement of the equation has been met.
Most companies use a straightforward format for the balance sheet, which comes from accounting standards. However, some investors prefer other presentations, such as the classified balance sheet.
What is a Classified Balance Sheet?
A classified balance sheet follows the same format as a typical balance sheet. However, it rearranges some items to make them more readable. The classified balance includes assets, liabilities, and shareholders’ equity. It classifies these into subcategories of accounts. However, there is no standard method of preparing the classified balance sheet. Companies must choose how to present it.
The classified balance sheet aggregates balances into several categories. While these categories depend on the company management’s judgment, the goal is to make them more readable and accessible. Due to this approach, users can comprehend and extract information more easily. Primarily, the classified balance sheet provides organized details of the company’s operations compared to the typical balance sheet.
What is the format of the Classified Balance Sheet?
The typical balance sheet comes with a standardized format from various accounting principles and standards. However, the classified one does not have these requirements. Usually, companies include several subheadings in the classified format to expand and categorize information better. Some of the categories within the classified balance sheet may include the following.
- Fixed assets
- Long-term assets
- Intangible assets
- Current assets
- Current liabilities
- Long-term liabilities
- Shareholders’ equity
Each subheading includes various line items like the typical balance sheet. Companies may also choose to prepare the classified balance sheet using a two-sided approach. Consequently, they will put assets on one side and liabilities and equity on the other. Either way, the classifications within these headings will remain the same.
Example
Given below is an example of a typical classified balance sheet.
| Current Assets | Current liabilities | ||
| Inventories | XUZ | Accounts payable | XYZ |
| Account receivables | XYZ | Accrued expenses | XYZ |
| Cash and cash equivalent | XYZ | Overdraft | XYZ |
| Total current assets | XYZ | Total current liabilities | XYZ |
| Fixed assets | Long-term liabilities | ||
| Building | XYZ | Bank loan | XYZ |
| Land | XYZ | Notes payable | XYZ |
| Equipment | XYZ | Total long-term liabilities | XYZ |
| Total fixed assets | XYZ | Shareholders’ equity | |
| Long-term investments | Share capital | XYZ | |
| Investment in ABC Co. | XYZ | Share premium | XYZ |
| Investment in XYZ Co. | XYZ | Retained earnings | XYZ |
| Total long-term investments | XYZ | Total shareholders’ equity | XYZ |
| Total assets | XYZ | Total liabilities and equity | XYZW |
What is the importance of the Classified Balance Sheet?
The classified balance sheet provides companies with an alternative way of reporting their financial position. On top of that, it allows them to help investors and other stakeholders understand and analyze the information. Similarly, the classified balance sheet enhances ratio analysis by classifying related data. Compared to its traditional counterpart, the classified version provides significant advantages.
The classified balance sheet also allows companies to provide more information to users than the traditional one. It helps explain various areas better, such as accrued and prepaid expenses, liabilities, fixed assets, etc. Although most companies use the traditional balance sheet, investors may prefer the classified one more.
Conclusion
The balance sheet is a financial statement that reports on the financial position of an entity. While most companies prepare the standardized version of this statement, some prefer the classified one. The classified balance sheet provides better information on various subcategories while maintaining the essence of the accounting equation.
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