Updated July 15, 2023
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 understand 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 to 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 so 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 no subcategories have been prescribed, nor is there any limit on the number of sub-headings to be created under each title. 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 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 twelve months after the reporting period. Accounting standards may also provide additional conditions for classifying items as non-current and current, such as for current assets. IAS-1 states that an item 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 are 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 are 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 Equations 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:
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 Sheets
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 to provide 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 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 performs and the position of various assets and liabilities.
- The bankers can easily access an organization’s liquidity by 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 sheets, advantages, and examples. You may also have a look at the following articles to learn more –