Classified Balance Sheet

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.

Explanation

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:

Assets

1. Property, plant and, equipment
2. Trade and other receivables
3. Cash and cash equivalents
4. Financial assets
5. Inventories

Liabilities

1. Trade and other payables
2. Provisions
3. Financial liabilities
4. Borrowings
5. Employee benefit liabilities

Equity

1. Issued capital
2. Reserves

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)

Particulars	Notes	Year Ended
		31.12.2020	31.12.2019
Assets
Non-Current Assets
Goodwill		7,419	5,902
Other intangible assets		25,972	19,995
Property, plant and equipment		56,606	23,422
Investments accounted for using the equity method.		947	799
Investment property		12,754	12,509
Other long-term assets		126	102
Other long-term financial assets		4,104	3,917
Total Non-Current Assets		107,796	66,514
Inventories		32,422	29,627
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
Total Assets		212,707	133,124
Equity
Equity attributable to owners of the parent:
Share capital		15,842	12,292
Share premium		40,067	4,487
Other components of equity		602	742
Retained earnings		61,082	42,193
Equity attributable to owners of the parent		117,527	59,648
Non-controlling interest		802	670
Total equity		118,307	60,296
Liabilities
Non-Current Liabilities
Pension and other employee obligations		12,353	11,978
Borrowings		51,940	25,953
Trade and other payables		1,360	22
Deferred tax liabilities		1,381	902
Other liabilities		1,876	2,079
Total Non-Current Liabilities		68,822	40,846
Current Liabilities
Provisions		637	2,302
Pension and other employee obligations		1,647	1,420
Borrowings		6,530	5,185
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 Liabilities		94,422	72,850
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.

Advantages

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.

Recommended Articles

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 –

1. Balance Sheet Analysis
2. Long Term Debt in Balance Sheet
3. Off-Balance Sheet Financing
4. Balance Sheet Items