Definition of Classified Balance Sheet
A classified balance sheet is a type of balance sheet presented so that the sub-components of assets, liabilities, and equity are presented so that the readers get a better understanding of the items of the financial statements. The broader headings are broken down into simpler, smaller headings for better readability of the annual accounts.
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. To achieve this objective, the financial statements are usually prepared in such a manner that each of the broad headings of assets, liabilities, and equity is further classified into a number of meaningful sub-headings.
The management has to decide what type of classification it wants to apply to the headings since there are no set of subcategories that have been prescribed, nor there is any limit on the number of sub-headings that are to be created under each heading. However, it is important to first classify the assets and liabilities and current and non-current as a bare minimum. Further, accounting standards may prescribe minimum reporting line items.
Objectives of Classified Balance Sheet
Classified balance sheets are prepared to meet the following objectives:
- Make the analysis and understanding of financial statements easier.
- Understand the nature of assets, liabilities, and equity in the company’s financial statements.
- Determine the company’s liquidity position by understanding the level of current assets available to meet the current liabilities.
- Make it easier to compare the changes in liabilities and assets from the last reporting year.
Classification of Classified Balance Sheet
Some of the widely used classifications for balance sheet components are as below:
- Property, plant and, equipment
- Trade and other receivables
- Cash and cash equivalents
- Financial assets
- Trade and other payables
- Financial liabilities
- Employee benefit liabilities
- Issued capital
Further assets and liabilities are to be classified as long-term and short-term on an item to item basis based on whether those items are expected to be realized (in case of assets) or settled (in case of liabilities) within a period of twelve months after the reporting period. Accounting standards may provide for additional conditions too for classification of items as non-current and current such as for current-assets IAS-1 states that an item that is primarily held for trading purposes shall be classified as non-current.
Example of Classified Balance Sheet
Here is how a classified balance sheet normally looks.
Balance Sheet as At 31.12.2020
(Amounts expressed in hundreds of dollars currency units)
|Other intangible assets||25,972||19,995|
|Property, plant and equipment||56,606||23,422|
|Investments accounted for using the equity method.||947||799|
|Other long-term assets||126||102|
|Other long-term financial assets||4,104||3,917|
|Total Non-Current Assets||107,796||66,514|
|Prepayments and other short-term assets||225||233|
|Trade and other receivables||28,429||22,319|
|Derivative financial instruments||695||835|
|Cash and cash equivalents||711||673|
|Other current assets||42,561||9,819|
|Assets included in a disposal group classified as held for sale.||22||3,258|
|Total Current Assets||104,933||66,632|
|Equity attributable to owners of the parent:|
|Other components of equity||602||742|
|Equity attributable to owners of the parent||117,527||59,648|
|Pension and other employee obligations||12,353||11,978|
|Trade and other payables||1,360||22|
|Deferred tax liabilities||1,381||902|
|Total Non-Current Liabilities||68,822||40,846|
|Pension and other employee obligations||1,647||1,420|
|Trade and other payables||10,574||18,827|
|Current tax liabilities||3,035||837|
|Contract and other liabilities||3,309||3,182|
|Liabilities included in a disposal group classified as held for sale.||22||405|
|Total Current Liabilities||25,622||32,026|
|Total Equity and Liabilities||212,707||133,124|
How to Use Accounting Equation with Classified Balance Sheets?
The accounting equation is used in the double-entry system and establishes a relationship between assets, liabilities, and equity. The same is presented below:
Total Assets = Equity + Total Liabilities
The equation shall also hold true in the case of a classified balance sheet. This means that when you add all classifications of assets, it shall be equal to the sum of all classifications of equity and liabilities. This is how the balance sheet tallies.
Classified Balance Sheets vs Unclassified Balance Sheet
In a classified balance sheet, financial information is presented in detail. The components of assets, liabilities, and equity are broken down into further sub-headings for provided in-depth information to the users. The components of assets and liabilities are also classified as current and non-current. Larger organizations use a classified balance sheet format as the format provides for detailed information to the users for better decision-making.
While in the case of an unclassified balance sheet, no such bifurcation of components is made. Thus, all line items are presented without any sub-heading. Though it is easier to prepare, it leads to confusion since making decisions from such a balance sheet becomes difficult. Smaller organizations usually follow this format.
Preparing a classified balance sheet offers the following advantages:
- It becomes easier for the reader of the financial statements to understand the balance sheet’s information.
- It also helps to carry out ratio analysis since the items are classified as current and non-current.
- It helps the investors understand how the company is performing and the position of various assets and liabilities.
- The bankers can easily access the liquidity of an organization through analyzing a classified balance sheet.
This is a guide to the Classified Balance Sheet. Here we also discuss the definition and classification of classified balance sheet along with advantages and example. You may also have a look at the following articles to learn more –
- Balance Sheet Analysis
- Long Term Debt in Balance Sheet
- Off-Balance Sheet Financing
- Balance Sheet Items