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Classified Balance Sheets, Explained

What Is a Classified Balance Sheet?
Susan Guillory
Susan GuilloryUpdated January 30, 2023
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A classified balance sheet is essentially a balance sheet that provides a lot more detail about a company's assets, liabilities, and equity at a given point in time. While many small businesses utilize a standard (or unclassified) balance sheet, you may find it useful to run a more detailed statement. Lenders and investors also typically like to see classified balance sheets vs. balance sheets when deciding whether to make an investment or approve a loan.Here’s what you need to know about a classified balance sheet, including how it differs from a balance sheet, its pros and cons, and what formula to use.

What Is a Classified Balance Sheet?

To understand the definition of a classified balance sheet, it helps to start with an understanding of what a balance sheet is. One of a company's three main financial statements, a balance sheet shows what a business currently owns (its assets), what it owes (its liabilities), and what the owners have invested in the business (called owners’ or shareholder’s equity). A classified balance sheet is simply a balance sheet that divides assets, liabilities, and equity into distinct subcategories, rather than simply listing them in standard balance sheet format. For example, you might divide assets into current and long-term assets and subcategorize liabilities into current and long-term liabilities.This more detailed presentation can be useful because it gives you more information about exactly what your company owns and what kind of debt it's carrying. In addition, a lender may ask to see your classified balance sheet if you ever apply for a small business loan.There are no rules as to what subcategories, or how many, you should use on a classified balance sheet. You can list whatever classifications make the most sense for your business.Recommended: What is Off-Balance-Sheet Financing? 

Classified Balance Sheets vs. Balance Sheets

Both regular balance sheets and classified balance sheets include a company’s assets, liabilities, and equity at a certain point in time. And, both include the same totals for these three categories. However, there are a few key differences between a classified balance sheet vs. a balance sheet.The biggest is that a classified balance sheet breaks down assets and liabilities into multiple subcategories. This can provide more insight into your ability to generate cash and sustain business operations. It can also help you make smart financial decisions, such as whether your business may need additional working capital  from outside sources.The details provided in a classified balance sheet can also make it easier for owners, investors, and creditors to calculate key financial ratios. For example, you can use a classified balance sheet (but not a balance sheet) to calculate the current ratio, which compares current assets to current liabilities to assess a company’s solvency.

Common Classified Balance Sheet Categories

Here’s a look at some of the classifications businesses commonly put on their classified balance sheets.

Assets

This section is often broken down into these three types of assets.Current AssetsThis includes assets that can be liquidated quickly and used for a company's immediate needs. Current assets on a classified balance sheet may include further detail on balances for:Fixed AssetsFixed assets are assets a business buys for long-term use and generally can’t be converted into cash quickly. Under fixed assets, you may also see these line items:
  • Furniture
  • Land 
  • Equipment
  • Vehicles
  • Buildings
  • Leasehold improvements
Intangible (or Other) AssetsThis section might include assets such as:
  • Copyrights
  • Trademarks
  • Goodwill

Liabilities

The liabilities category may break the company’s debts into three main subcategories.Current LiabilitiesCurrent liabilities include expenses and debts that need to be paid off within the next 12 months. A classified balance sheet might include:Long-Term LiabilitiesThe long-term liabilities section lists the obligations that are not due in the next 12 months. This might include loans with five 10, or 30-year terms. Keep in mind, though, that a portion of these long-term debts will be due in the next 12 months. Thus, this portion is always reported in the current liabilities section.Long-term liabilities might include:
  • Long-term loans
  • Deferred taxes
  • Mortgage
Recommended: What Are Common Business Loan Terms? 

Equity

Equity is the remaining value of an owner’s interest in a company after all liabilities have been deducted. This section tends to resemble a standard balance sheet and may include:
  • Owner’s capital
  • Retained earnings
  • Additional contributions paid
Recommended: What is a Trial Balance Sheet? 

Pros and Cons of Classified Balance Sheets

The main advantage to a classified balance sheet is that it provides more information and insight into your business’s financial health. It also makes it easy to calculate ratios that can provide further insights into how your company is doing. Plus, if you are looking to woo an investor or get different types of small business loans, you may need (or want) to provide them with a classified balance sheet.On the downside, creating a classified balance sheet takes more time and effort compared to an unclassified balance sheet. This can result in more work for you or, if you use an outside accountant, higher costs. If your company’s assets are straightforward, it may not be worth the trouble or expense of creating a classified balance sheet. Also certain small business lenders, such as online lenders, may not require it. 

Classified Balance Sheet Example

Here’s an example of a classified balance sheet for a fictional business.Company ABCStatement of Financial Position
ASSETS LIABILITIES AND EQUITY
Current assets Current liabilities
Cash$25,000Accounts payable$15,000
Accounts Receivable$30,000Accrued expenses$27,000
Inventory$5,000Total current liabilities$42,000
Total current assets$60,000
Long-term liabilities
Fixed assets Bank loan$75,000
Equipment $33,000Deferred taxes$16,000
Land$200,000Mortgage payable$20,000
Furniture$3,000Total long-term liabilities$111,000
Total fixed assets $236,000
Total liabilities$153,000
Total assets $296,000
Owners’ equity
 Retained earnings $35.000
Owner’s equity$108,000
Total equity$143,000
Total liability and equity$296,000

Using the Accounting Equation with Classified Balance Sheets

Both a classified and an unclassified balance sheet must adhere to this basic accounting equation:Total Assets = Total Liabilities + Owners' EquityTo use the accounting equation with the classified balance sheet for Company ABC above, this is what you would get: $296,000 (Total Assets) = $153,000 (Total Liabilities) + $143,000 (Owners’ Equity)Company ABC’s classified balance sheet follows the accounting equation and is in balance.

The Takeaway

A balance sheet shows your company’s assets, liabilities, and net worth at a certain point in time. The classified balance sheet takes that concept to the next level by breaking down the three main categories of the balance sheet into smaller subcategories (or classifications). As a result, it provides even more financial information about your business. Large companies typically run classified balance sheets vs. unclassified balance sheets. But even small business owners can benefit from creating a classified balance sheet. Plus, you could potentially need one if you ever apply for small business financing.

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  3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Frequently Asked Questions

How are classified balance sheets different from other balance sheets?
What are the categories of assets in a balance sheet?
Why are classified balance sheets used?
Photo credit: iStock/Boris Jovanovic
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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