What Is A Classified Balance Sheet? (Plus How To Use One)
Updated 28 September 2022
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Financial reporting is an important business function that ensures a company complies with business regulations and provides accurate information to investors. If you are a finance or management professional, learning about different financial reporting tools can help you choose the ideal report to measure a company's assets and liabilities. One key financial reporting tool is the balance sheet, which compares a company's assets to its liabilities and may include special classes for asset and liability types.
In this article, we define classified balance sheets, describe some common categories for this report, share some benefits of using this type of balance sheet and explain how to use the accounting equation with it.
What Is A Classified Balance Sheet?
A classified balance sheet is a financial report that shows information about a company's holdings, organised into categories or classes. Many accounting and finance professionals use these reports because this format allows them to include a wide range of financial details on a single report. This makes it a useful document for shareholder meetings and other events where people discuss the company's financial standing.
Related: What Is A Balance Sheet? (With Template And Example)
What Do These Reports Include?
While these reports might have varying financial details, depending on the company size and industry, many of these documents include the following categories:
Current assets are assets that a company can translate into cash at short notice. This classification includes cash, but it also includes non-cash assets that can be easily redeemed, like accounts receivable, which is the money owed to the company by customers. If a company pre-paid for services, like Internet services or a cleaning crew, the value of the pre-paid service is also a current asset. Here are some common current assets:
Cash equivalents, like short-term investment securities
Publicly traded securities
Related: What Is Asset Management? (With Career Options)
Long-term assets are assets that might take longer to convert into cash if the company needs capital. While these assets are less liquid, or convertible, they often appreciate in value faster than current assets, which can make them a valuable part of a company's asset portfolio. Here are some examples of long-term assets companies might own:
Real estate purchased for investment purposes
Investment in other companies
Stocks and bonds the company holds for more than a year
Cash in long-term high-interest savings accounts
Related: What Are Asset Classes? (With Definition And Types)
Fixed assets are a specialised type of asset that has a physical form. Typically, people involved in the business use fixed assets in their daily work to accomplish the tasks that make revenue for the company. For example, a medical equipment manufacturing company might own a 3D printer, which the technicians use to create prototypes. The printer is a fixed asset that has independent value. The company's owners might choose to sell fixed assets if they need more capital. Here are some examples of fixed assets:
Land used for business processes
Furniture and light fixtures
Raw material for creating products
Related: Asset Vs. Expense: Differences, Types And Best Practises
Intangible assets do not have a physical form or a standard monetary equivalent, but they do provide value to the company. These assets are ideas or concepts that the company has a legal right to protect. If a balance sheet features intangible assets, it might list an estimated value for these assets. Here are some examples of common intangible assets:
Copyrighted images or slogans
Related: What Is A Tangible Asset? (Guide, Steps And Types)
Current liabilities are amounts of money that a company owes to lenders or service providers and that are due within 12 months. Typically, financial professionals list these short-term obligations on the right side of a balance sheet. The company's ability to pay current liabilities can affect its yearly profit. Here are some examples of current liabilities that you might list:
Lease on equipment
Accounts payable to service providers, like Internet and phone companies
Related: What Are Current Liabilities? (And How To Record Them)
Long-term liabilities are obligations that the company expects to fulfil more than a year in the future. Sometimes, long-term liabilities can become current liabilities when the company's situation changes. For example, pensions are typically long-term liabilities, but when an employee announces they plan to retire that year, the employee's pension becomes a current liability because the money for the pension comes from this year's revenue. Here are some examples of long-term liabilities:
Deferred income tax
Related: Basics of Accounting - Terminology, Principles And Concepts
Shareholder equity is the amount of money that a company's owner or other shareholders might receive if the company stops operating after paying liabilities. This metric can indicate the overall value of a company after the accounting team subtracts any money the company owes to lenders, landlords or employees. Here are some components of shareholder equity:
Any additional invested capital
Related: What Is A Shareholder? (With Rights And Responsibilities)
Benefits Of Using This Tool
Here are some key benefits of using these documents to account for a company's assets and liabilities:
Ability to customise
Because this report can include a wide range of financial information, it is easy to customise the report to fit an organisation's financial standing and growth goals. You can include any assets the company owns, along with any liabilities that the company owes to vendors and other organisations. The custom nature of this sheet format makes it an effective tool for small, mid-size and large businesses.
For example, an accountant for a small clothing firm might use this report to list tangible assets, like sewing machines and fabric stock, next to the company's current and long-term liabilities, like employee wages and rent in the shop. Since the company is small, the sheet might be relatively short. The sheet for a larger, more established business might also list investments and bonds. While these two companies have different revenue and expenses, the accountants can use the same basic sheet model and add the categories they want to use.
Related: Finance Skills To Include On Your Resume (With Tips)
Ease of use
Because these reports have categories, they can be easier to understand than some other types of balance sheets. The organisation also makes it possible to include vast amounts of data on a single sheet. Accountants who use electronic balance sheets can optimise this organisation by using tabs to hide and show certain details. That way, readers can focus on certain assets during discussions and meetings. The structure of this report makes it a more accessible resource for readers who do not have a background in finance.
For example, the accountants for a tutoring company might create one of these reports that lists all the company's assets and liabilities. During a meeting between major investors and the company's leadership team to discuss opening a new market, the CEO might share the report and direct the attendees' attention to the company's long-term assets tab. While the investors might not be financial experts, they can use this tool to understand how much money the company has in long-term assets, which can help them decide which assets to convert to cash to fund a growth plan.
Related: What Is A Financial Statement? (With Importance And Types)
Enhanced financial insights
While simpler reports might group all of a company's assets and liabilities into two categories, this model provides more refined classifications, which can help a company's leadership team identify areas for improvement. By understanding where the company gains and loses the largest amounts of money, the leadership can devise strategies to maximise income and minimise loss. These reports provide total sums of assets and liabilities, which allow the leadership team and investors to evaluate the company's overall financial status quickly.
For example, the leadership team of a small bakery might traditionally use a simple balance sheet, which lists the company's assets in one column and liabilities in another. While this model allows them to balance the company's gains and losses, a classified model can help them identify where the company is strong and where it might benefit from improvement. If they use a classified balance sheet, they might realise that the company's current assets outweigh its long-term assets, motivating the bakery's owner to place some of the available capital in long-term, high-interest investments to make more of a profit.
How To Use The Accounting Equation With This Type Of Report
One key function of a balance sheet is to verify that a company's assets are equal to the combination of its liabilities and shareholders' equity. To make sure the company's financial reporting is correct, you can use the accounting equation, which is:
Total liabilities + shareholders' equity = total assets
Here's how to use this equation with this type of balance sheet:
Combine the value of all asset classes, including current, long-term and fixed assets.
Combine all liabilities, including short-term and long-term debts.
Add the liabilities to the estimated shareholders' equity.
Compare the total of the liabilities and shareholders' equity to the assets.
If the equation does not balance, check the accounting figures for each class to ensure the reporting is correct.
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