A classified balance sheet is essentially a balance sheet that provides more detail about a company’s assets, liabilities, and equity at a given point in time.
While many small businesses utilize a standard (or unclassified) balance sheet, you may find it useful to run a more detailed statement. Lenders and investors also typically like to see classified balance sheets vs. balance sheets when deciding whether to make an investment or approve a loan.
Here’s what you need to know about a classified balance sheet, including how it differs from a balance sheet, its pros and cons, and what formula to use.
Key Points
• Classified balance sheets provide a clearer and more detailed view of a company’s financial position, making it easier to assess liquidity and long-term solvency compared to the simpler presentation of a regular balance sheet.
• A classified balance sheet categorizes assets, liabilities, and equity into subgroups like current and non-current.
• Key sections include current assets (cash, accounts receivable), non-current assets (property, equipment), current liabilities (short-term debts), long-term liabilities, and shareholders’ equity.
• This format provides valuable insights for investors, creditors, and management to make informed decisions regarding the company’s financial health and strategies.
• When looking for an investor or small business loan, you may be required to present a classified balance sheet as opposed to a regular balance sheet.
What Is a Classified Balance Sheet?
To understand the definition of a classified balance sheet, it helps to start with an understanding of what a balance sheet is.
One of a company’s three main financial statements, a balance sheet shows what a business currently owns (its assets), what it owes (its liabilities), and what the owners have invested in the business (called owners’ or shareholder’s equity).
A classified balance sheet is simply a balance sheet that divides assets, liabilities, and equity into distinct subcategories, rather than simply listing them in standard balance sheet format. For example, you might divide assets into current and long-term assets and subcategorize liabilities into current and long-term liabilities.
This more detailed presentation can be useful because it gives you more information about exactly what your company owns and what kind of debt it’s carrying. In addition, a lender may ask to see your classified balance sheet if you ever apply for a small business loan.
There are no rules as to what subcategories, or how many, you should use on a classified balance sheet. You can list whatever classifications make the most sense for your business.
Recommended: Guide to Off-Balance-Sheet Financing
Classified Balance Sheets vs. Balance Sheets
Both regular balance sheets and classified balance sheets include a company’s assets, liabilities, and equity at a certain point in time. And, both include the same totals for these three categories. However, there are a few key differences between a classified balance sheet vs. a balance sheet.
The biggest is that a classified balance sheet breaks down assets and liabilities into multiple subcategories. This can provide more insight into your ability to generate cash and sustain business operations. It can also help you make smart financial decisions, such as whether your business may need additional working capital from outside sources.
The details provided in a classified balance sheet can also make it easier for owners, investors, and creditors to calculate key financial ratios. For example, you can use a classified balance sheet (but not a balance sheet) to calculate the current ratio, which compares current assets to current liabilities to assess a company’s solvency.
Recommended: Accounts Payable vs Notes Payable
Common Classified Balance Sheet Categories
Here’s a look at some of the classifications businesses commonly put on their classified balance sheets.
Assets
This section is often broken down into these three types of assets.
Current Assets
This includes assets that can be liquidated quickly and used for a company’s immediate needs. Current assets on a classified balance sheet may include further detail on balances for:
• Cash
• Prepaid expenses
• Assets for sale
• Inventories
Fixed Assets
Fixed assets are assets a business buys for long-term use and generally can’t be converted into cash quickly. Under fixed assets, you may see these line items:
• Furniture
• Land
• Equipment
• Vehicles
• Buildings
• Leasehold improvements
Intangible (or Other) Assets
Intangible assets might include assets such as:
• Copyrights
• Trademarks
• Goodwill
Liabilities
Business liabilities may break the company’s debts into three main subcategories.
Current Liabilities
Current liabilities include expenses and debts that need to be paid off within the next 12 months. A classified balance sheet might include:
• Accounts payable
• Line of credit
• Current tax liabilities
Long-Term Liabilities
The long-term liabilities section lists the obligations that are not due in the next 12 months. This might include loans with five, 10, or 30-year terms. Keep in mind, though, that a portion of these long-term debts will be due in the next 12 months. Thus, this portion is always reported in the current liabilities section.
Long-term liabilities might include:
• Deferred taxes
• Mortgage
Recommended: What Are Common Business Loan Terms?
Equity
Equity is the remaining value of an owner’s interest in a company after all liabilities have been deducted. This section tends to resemble a standard balance sheet and may include:
• Owner’s capital
• Retained earnings
• Additional contributions paid
Recommended: Guide to Trial Balance Sheets
Pros and Cons of Classified Balance Sheets
The main advantage to a classified balance sheet is that it provides more information and insight into your business’s financial health. It also makes it easy to calculate ratios that can provide further insights into how your company is doing. Plus, if you are looking to use an investor or get different types of small business loans, you may need (or want) to provide them with a classified balance sheet.
On the downside, creating a classified balance sheet takes more time and effort compared to an unclassified balance sheet. This can result in more work for you or, if you use an outside accountant, higher costs. If your company’s assets are straightforward, it may not be worth the trouble or expense of creating a classified balance sheet. Also certain small business lenders, such as online lenders, may not require it.
Classified Balance Sheet Example
Here’s an example of a classified balance sheet for a fictional business.
| ASSETS | LIABILITIES AND EQUITY | ||
|---|---|---|---|
| Current assets | Current liabilities | ||
| Cash | $25,000 | Accounts payable | $15,000 |
| Accounts Receivable | $30,000 | Accrued expenses | $27,000 |
| Inventory | $5,000 | Total current liabilities | $42,000 |
| Total current assets | $60,000 | ||
| Long-term liabilities | |||
| Fixed assets | Bank loan | $75,000 | |
| Equipment | $33,000 | Deferred taxes | $16,000 |
| Land | $200,000 | Mortgage payable | $20,000 |
| Furniture | $3,000 | Total long-term liabilities | $111,000 |
| Total fixed assets | $236,000 | ||
| Total liabilities | $153,000 | ||
| Total assets | $296,000 | ||
| Owners’ equity | |||
| Retained earnings | $35,000 | ||
| Owner’s equity | $108,000 | ||
| Total equity | $143,000 | ||
| Total liability and equity | $296,000 |
Using the Accounting Equation with Classified Balance Sheets
Both a classified and an unclassified balance sheet must adhere to this basic accounting equation:
To use the accounting equation with the classified balance sheet for Company ABC above, this is what you would get:
Company ABC’s classified balance sheet follows the accounting equation and is in balance.
The Takeaway
A balance sheet shows your company’s assets, liabilities, and net worth at a certain point in time. The classified balance sheet takes that concept to the next level by breaking down the three main categories of the balance sheet into smaller subcategories (or classifications). As a result, it provides even more financial information about your business.
Large companies typically run classified balance sheets vs. unclassified balance sheets. But even small business owners can benefit from creating a classified balance sheet. Plus, you could potentially need one if you ever apply for small business financing.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How are classified balance sheets different from other balance sheets?
Classified balance sheets break the three main components of a balance sheet (assets, liability, and owners’ equity) into subcategories in order to provide more information about a company’s financial position.
What are the categories of assets in a balance sheet?
The three main types of assets on a balance sheet are current assets, fixed assets, and intangible assets.
Why are classified balance sheets used?
Classified balance sheets provide more details than standard balance sheets. As a result, they can help business owners better track their assets and liabilities and make important financial decisions. Investors and lenders often prefer classified balance sheets because they make it easier for them to analyze a company’s financials.
Photo credit: iStock/Boris Jovanovic
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