Aug 01 2011
A simple definition of a classified balance sheet is a balance sheet that categorizes both assets and liabilities into short-term and long-term categories.
For example, a balance sheet could simply lump all types of assets under the sub-heading “Assets.” However it is more useful to break assets up into separate categories like current assets, long-term assets, and intangible assets.
Similarly a company could lump all liabilities into one category. However it is more useful to categorize a company’s debts into current liabilities and long-term liabilities.
Classified Balance Sheet Example
Where to Find Classified Balance Sheet Templates
Microsoft Office has a good template here (this is for Excel):
Keep in mind that any accounting software you purchase will come with a classified balance sheet template.
Why is Classified Balance Sheet more Useful?
Let’s pretend for a second that you have two friends who want to borrow money from you. One of your friends has $5,000 worth of cash (a current asset) on his balance sheet. The other friend has $5,000 worth of land (a long-term asset) on his balance sheet. Which one would you prefer to loan the money to if you needed your money back in a few weeks?
Most people would prefer to lend money to the friend with $5,000 cash. Why? Because it is much more likely that this friend will be able to pay you back in the next few weeks. The friend with the land will have
to go to the trouble of actually selling the land. His assets are less liquid than your friend with the cash. Liquid assets are easily converted to cash. Illiquid assets like land take time and energy to convert to cash. If all of a company’s assets were lumped into one account then it would be difficult to determine how liquid a company was.
A classified balance sheet clearly illustrates the liquid and illiquid assets. This helps creditors and investors make better decisions. The current assets will be used or converted to cash within the next year. The long-term assets will not be used or converted to cash within the next year.
Net Working Capital is Clearly Illustrated on a Classified Balance Sheet
Net working capital is an accounting ratio that is very useful to credits and investors. Net Working Capital = Current Assets – Current Liabilities. In other words, net working capital shows the amount of current assets a company has left over after it pays off all of its current debt. Remember that current liabilities are all of those liabilities that will need to be paid within the next year. If a company doesn’t have enough money to pay off all of its current liabilities then it is going to have a hard time getting additional financing.
As illustrated in the classified balance sheet example at the top of this post, it is easy to see a company’s net working capital when assets and liabilities are classified.