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. In Lesson 1, we learned that the balance sheet measures the financial strength of a business at a particular date by comparing assets, liabilities, and stockholders’ equity. Essentially, the balance sheet represents the basic accounting equation. It is only accurate for a moment in time because it reflects what the company currently owns and owes, as well as the claims of the owners.
The categorizations allow the reader of the financial statement to determine how much the company owns and how easily it could turn its asset holdings into cash in an emergency. These three ratios are difficult to mine from a regular balance sheet because it is not clear which assets and liabilities are current and which are not. Investors and financial analysts appreciate being able to easily access the information under useful categorizations from a classified balance sheet. There is nothing that requires that a business activity be conducted through a corporation. If the preceding classified balance sheet illustration was instead being prepared for a sole proprietorship, it would look the same except that the equity section would consist of a single owner’s capital account . If several persons are involved in a business that is not incorporated, it is likely a partnership.
What Are the Uses of a Balance Sheet?
Primarily, the classified balance sheet provides organized details of the company’s operations compared to the typical balance sheet. Common current liabilities include accounts payable, accrued expenses, current portions of long-term debt, and shareholder loans. A balance sheet is a statement of a business’s assets, liabilities, and shareholders’ equity. Balance sheets offer a snapshot of your business assets and any debts that it owes, as well as the amount invested by the owners. Current liabilities are those expenses that will become due within one year. The category includes 12 months of principal on notes payable; your accounts, salaries and interest payables; accrued liabilities; client retainers or deposits; and unearned revenue. You might also need contra accounts for your current liabilities, such as for discounts on your notes payable.
Why is a classified balance sheet important?
The classified balance sheet is important because it provides interested parties with the means to analyze key company metrics like the quick, current, and cash ratios. It also allows the reader to get insight into the company’s asset holdings and debt structure.
Importantly, some long-term notes may be classified partially as a current liability and partially as a long-term liability. The portion classified as current would be the principal amount to be repaid within the next year . Any amounts due after that period of time would be shown as a long-term liability. 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.
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.
A balance sheet is a financial statement composed of assets, liabilities, and stockholder’s equity. It is the financial statement that demonstrates the accounting equation is in balance. The equity section of a classified balance sheet is very simple and similar to a non-classified report. Common stock, additional paid-in capital, treasury stock, and retained earnings are listed for corporations.
All these classifications must work according to the proposition that total assets must be equal to the sum of total liabilities and shareholder’s equity. Financial statements are prepared at the of the accounting period, to report the performance of the business. The financial statements shall be prepared in such a manner that they provide a true and fair view of the business’s financial affairs to the users of the statement. An example of a classified balance sheet is one where assets and liabilities are categorized in order of liquidity. Liabilities can be classified into current, for those due in less than one year, and long-term, for those due in over one year. It is worthy of note that intangible assets can only be placed on a balance sheet if they were acquired from a different company or entity. If they were created within the company, then they are not allowed on the balance sheet and must be expense per the rules established by the Financial Accounting Standards Board.