Classified Balance Sheet
To improve users’ understanding of a company’s financial position, companies often use a classified balance sheet. Financial statements of the company show its financial health, position and its operational activities. Balance sheet is a principal financial statement which shows the financial standing of the company at a particular time. It presents the snapshot of the company’s position at the date it is prepared. Other titles of balance sheet include statement of financial position and statement of financial condition. Balance sheet is used to provide picture to insiders and outsider about the financial health of organization and how its assets are financed by debt and equity. Its shows the capital structure of firm and helps creditor to take decision regarding credit extension and its terms.
Classified Balance Sheet Format
There are three basic elements of balance sheet Assets, Liabilities and shareholder equity. Information regarding their details can either be provided by wider categories or it can be presented by subcategories to show classification of its basic elements. In classified balance sheet accounts of assets are sub-categorize as current asset, long-term investments, property, plant and equipment and intangible assets, on the other hand liabilities as current liabilities and long-term liabilities on basis of their maturity along with owner’s or shareholders’ equity.
Accounts of Classified Balance Sheet
Current assets are liquid as they can be converted into immediately as compared to fixed assets which are not highly liquid. Currents assets are further listed under this category on basis of liquidity such that most liquid item is at top of list and rest are listed from most liquid to least liquid. In case of liabilities, item with shortest maturity period is listed at top and then rest are listed from short to long term maturity.
Category of current assets include cash and equivalent, account receivable, inventories, prepaid expenses, and other short term nature assets. Fixed assets include property, plant, machine, equipment, building, investment in funds etc. where current liabilities include note payable, account payable, accrued expense, current portion of installment, deferred income tax and long term includes bond payable, bank loans etc. The shareholder equity is categorized into preferred stock, common stock, capital in excess of par and retained earnings. Whereas in unclassified balance sheet different accounts of assets, liabilities and shareholder equity are presented as a list on the same criteria as used by classified balance sheet but without classifying the accounts in subcategories like Current assets, fixed assets and intangible assets etc.
Advantage of Classified Balance Sheet
Classified balance sheet enables the user either insider or outsider to access the data with ease as all information is sorted out in categories. It makes clear distinction between the groups which enable the company to easily identify its composition of total assets and their financing. It facilities the company to easily identify and makes any potential changes or make a decision regarding investing in current or fixed assets and deciding the source and mix of financing. Moreover, it enables the users to easily calculate ratios for financial analysis that uses items of balance sheet for calculating ratios like acid test ratios.