What is a Classified Balance Sheet?
Updated: Sep 9, 2019
We all know that a balance sheet is a snapshot of a business's financial position at a certain point in time. A balance sheet lists individual assets, liabilities, and stockholders’ equity items. However, to improve investors’ and creditors’ understanding of a business’s financial position, businesses can use a classified balance sheet.
What is a classified balance sheet? A classified balance sheet gathers together specific assets and liabilities, using a number of sections and classification. The groupings have similar economic characteristics that are useful for any user.
Assets Liabilities and stockholder’s equity
Current Assets Current liability
Long-term investments Long-term liabilities
Property, plant, and equipment Stockholders’ equity
Current assets are assets that a business converts into cash or uses up within a year or an operating cycle. Examples of current assets are accounting receivable and supplies. What is the operating cycle? An operating cycle is the average time required to go from cash paid to cash from customers. Like purchasing inventory, selling it, then collecting the cash from the customers.
Long-term investments are assets a business holds onto for more than a year. Generally, investments in stocks and bonds are long-term investments. Other examples of long-term investments are land or buildings business isn’t currently using in its operating activity. Notes payable, written notes promising to pay a certain amount of money in a period of time, are also long-term investments.
Property, Plant, and Equipment
Property, plant, and equipment, sometimes called fixed assets or plant assets, are long term use assets that are currently used in operating a business. Land, buildings, equipment, vehicles, and furniture are all fixed assets.
Intangible assets are assets with no physical substance, but hold great value for the business. Trademarks are one common intangible asset. Others include copyrights, patents, trade names, and goodwill. These intangible assets give a business exclusive rights of use for a specific period of time.
Helpful Tip: Intangible assets are sometimes reported as "other assets."
Current liabilities are obligations to pay for amounts due to creditors within a year or an operating cycle. Examples of current liabilities are short-term debt, accounts payable, accrued liabilities, and other similar debts. The best way for a creditor to determine whether a company is able to pay off its current liabilities is using the current ratio (current assets divided by liabilities), or the quick ratio methods (current assets minus inventories divided by current liabilities).
Long-term liabilities are obligations of a business to pay off any debts that are due more than a year in the future. Liabilities in this category are bonds payable, mortgages payable, long-term notes payable, pension liabilities, and lease liabilities. In this section, they may include loans and deferred tax liabilities.
Stockholders’ equity, also called shareholders’ equity, is the remaining amount of assets left to give to shareholders after all liabilities are paid off. Stockholders’ equity is often referred to as “the book value” of the business and it consists of two parts: common stock (security that represents ownership in a corporation) and retained earnings (the portion of a company’s profits that it keeps to reinvest in the business or pay off debt.)
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