Classified Balance Sheet is the type Balance sheet in which all the balance sheet accounts are presented after breaking them into the different small categories which makes it easier for the user of the Balance sheet to have a clear understanding by organizing accounts into a format which is more readable.
What is the Classified Balance Sheet?
A classified balance sheet is a financial document that not only sub-categories the assets, liabilities, and shareholder equity but also presents meaningful classification within these broad categories. Simply put, it presents the financial status of the firm, to the user in a more readable format. It is one step ahead of the balance sheet, which is nothing but a way of representing the valuation of the assets and liabilities.
- When a firm publishes a classified balance sheet, it not only presents the valuation of its assets but also how these current valuations have been calculated. As they say, accounting is more science than math; there can be multiple ways of reporting an asset.
- Some assets are valued at historical, or book value like land and machinery, and some have a more complex way of calculations like goodwill and brand name.
- The classified balance sheet makes sure that all these calculations are properly communicated to the reader. Although there are no set rules for these classifications as an implicit industry practice, most businesses prefer reporting assets and liabilities based on a time horizon.
Example Format of Classified Balance Sheet
The following table shows the Classified Balance Sheet example format for a garment firm.
As shown above, the Classified Balance Sheet example, there are proper classifications that help the reader identify not only the assets or liabilities but also their type. It not only improves readability but also leaves little for interpretation, emphasizing transparency and the clarity of the management strategy.
Example Format of Classified Balance Sheet Asset
The format of the classified balance sheet ‘s asset side can be divided into three main categories.
#1 – Current Assets
source: Starbucks SEC Filings
These are the assets that are supposed to be consumed or sold to utilized cash within the operating cycle of the businessOperating Cycle Of The BusinessThe operating cycle of a company, also known as the cash cycle, is an activity ratio that measures the average time required to convert the company's inventories into cash. or with the current fiscal year. They are mainly required to fund the daily operations or the core business of the firm. An important characteristic is that they can be easily liquidated to generate cash, which helps a business in meeting any short term liquidity crunches. Although they vary from industry to industry, some common examples can be cash, cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market.., Inventory, accounts receivableAccounts ReceivableAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet., etc.
#2 – Fixed Assets
Fixed Assets are those long term assets that are not only utilized in the current fiscal year but many years after that. They are mainly one-time strategic investments that are needed for long term sustenance of the business. For an IT service industry, fixed assets will be desktops, laptops, land, etc. but for a manufacturing firm, it can be machinery and equipment. An essential characteristic of fixed assets is that they are reported at their book value and normally get depreciated with time.
#3 – Other Assets
The third category is the list of intangible assetsList Of Intangible AssetsSome of the most common intangible assets are logos, self-developed software, customer data, franchise agreements, Newspaper Mastheads, license, royalty, Marketing Rights, Import Quotas, Servicing Rights etc. that the firm has acquired over some time. These Include goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price., brand name, patents, copyrights, trademark, etc. They have a multi-period life. An essential characteristic of intangible assets that differentiates them from fixed assets is that they normally do not depreciate with time. Most often, their value increases as the firm grow and spends more time in the industry.
Example Format of Classified Balance Sheet’s Liabilities
The format of the classified balance sheet ‘s liabilities side can be divided into three main categories.
#1 – Current Liabilities
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 that is 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 liabilitiesExamples Of Current LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. include accounts payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period., accrued liabilitiesAccrued LiabilitiesAccrued liabilities refer to the obligations against expenses which the company incurs over one accounting period; however, it has not made any monetary payment for such expenses in the same accounting period. These expenses appear as liabilities in the corporate balance sheet., current portion of long term debt (CPLTD)Current Portion Of Long Term Debt (CPLTD)Current Portion of Long-Term Debt (CPLTD) is payable within the next year from the date of the balance sheet, and are separated from the long-term debt as they are to be paid within next year using the company’s cash flows or by utilizing its current assets., deferred revenueDeferred RevenueDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. , etc.
#2 – Long Term Liabilities
Long term liabilityLong Term LiabilityLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). is obligations that are supposed to be paid back in the future, possibly beyond the operating cycle or the current fiscal year. They are like long term debtTerm DebtLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability. where payments can take 5, 10, or maybe 20 years. Examples of long term liability can be corporate bondsCorporate BondsCorporate Bonds are fixed-income securities issued by companies that promise periodic fixed payments. These fixed payments are broken down into two parts: the coupon and the notional or face value., mortgages, pension liabilities, deferred income taxes, etc.
#3 – Shareholders Equity
The shareholder equity section mainly provides information about how the firm has been financed and how much profit it retains to reinvest further in the business. Items included in Shareholders’ equityItems Included In Shareholders' EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period. are common stock, additional paid-in capitalAdditional Paid-in CapitalAdditional paid-in capital or capital surplus is the company's excess amount received over and above the par value of shares from the investors during an IPO. It is the profit a company gets when it issues the stock for the first time in the open market., retained earnings and accumulated other comprehensive gains/losses, etc.
How Helpful Are These Formats?
A classified balance sheet format provides a crisp and crystal clear view to the reader. Although balance sheets are preparedBalance Sheets Are PreparedA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. by accountants most often than not, 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 reason it has been placed there. It also helps investors in their financial analysis and makes suitable decisions for their investments.
For example, an investor who is interested in the day to day operations and profitability of the firm would like to calculate the current ratioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it' short-term loans within a year. Current ratio = current assets/current liabilities . In a normal balance sheet, he would have to deep dive into every section 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 assetsCurrents AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. and liabilities. It will be easy to figure out and calculate even for a retail investorRetail InvestorA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making..
A well-represented and well-classified information instill confidence and trust in the creditors and investors. It also tells a lot about management who wants to be open not only about their assets and their valuations but also 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 itself rather than in the final stages when irrevocable damage has already been done. It conveys a strong message to the investors that their money is safe as management is serious not only about the business profitability but also running it ethically and within the rules of the land.
This article has been a guide to what is Classified Balance Sheet and its definition. Here we discuss the top examples of classified balance sheets along with its format (Assets, Liabilities, and Shareholders Equity). You may learn more about our articles below on accounting –