ARTICLE TABLE OF CONTENTS
When you go to produce a balance sheet, you have two options: classified or unclassified. In general and for most purposes, you will want an unclassified balance sheet — these balance sheets are simplified and often sufficient. But there are times when a classified balance sheet may be useful, too. Here’s what you need to know about the differences between a classified balance sheet and an unclassified balance sheet and when you might use one over the other.
An Introduction to Balance Sheets
A balance sheet will usually be required when:
- A business requests a loan or any type of new funding, such as a grant.
- A business goes through modifications, such as selling or purchasing shares.
- A business reviews its current financial standings, such as on a quarterly basis.
Balance sheets are one of the most important financial statements that an organization might have. It’s important that an organization always have balance sheets, profit and loss statements, and bank reconciliations. But balance sheets also come in two major types: classified and unclassified. If you’re printing out a balance sheet, you might need to select what type of sheet to print out.
What is a classified balance sheet?
One of the easiest ways to understand a classified balance sheet is to take a look at one. Here is an example of a classified balance sheet:
As you can see, rather than just having ‘assets’ and ‘liabilities’, everything is in a specific subsections: Current Assets, Non Current Assets, Current Liabilities and Non Current Liabilities. This subsection separation makes it easier to see where the assets and liabilities are coming from, thereby also making it easier to see what debts and assets the organization really has.
The classified balance sheet will show which asset subsections?
A classified balance sheet will show subsections such as current assets, long-term investments, property and equipment, intangible assets, and other assets. This is important to distinguish. Cash, for instance, is a very different type of asset than real estate, which in turn is a different type of asset from inventory. A classified balance sheet gives those reading the balance sheet far more information in terms of liquidity than they would have from an unclassified balance sheet, which further gives them more information to react to.
Of course, this also requires that everything is booked correctly under the right accounts and types of accounts. Those who are doing their own bookkeeping may need to go through their Chart of Accounts to ensure that this is correct.
In a classified balance sheet, how are assets usually classified?
Assets are classified first when they are booked. For instance, a cash account will be marked as a cash account when booked. An inventory asset will be marked as an inventory asset. When the balance sheet is printed out, assets will be classified iinto short term or long term assets. Being able to review the general ledger is important for specifically this reason; it ensures that all transactions have been booked correctly.
The classified balance sheet shows which liability subsections?
Usually, on a classified balance sheet, the liabilities section will have current liabilities as well as long-term liabilities. This distinction is important. Current liabilities are usually liabilities that need to be paid within 12 months whereas long-term liabilities are debts that do not have to be paid off within that time. They will not affect the organization’s cashflow within the next four quarters, but they are still debts that will need to be repaid.
In the case of loans that start now but go on for longer than 12 months (such as a mortgage loan), only the first 12 months of debts are placed into current liabilities and the rest are booked out to long-term liabilities. This still separates the debts into those that are going to impact cash flow now and those that are going to impact cash flow later. This gives a better picture of where the organization currently is and how its cash flow will be affected moving forward. An organization may have immense liabilities now but virtually no liabilities in the future, or the opposite might be true.
What is the order in which liabilities are generally listed on a classified balance sheet?
Usually, they are listed in current liabilities, which are more pressing, and then long-term liabilities, which are less pressing. This gives a better picture of which liabilities are going to need to be paid off quickly and which are more long-term, which contributes significantly to the overall financial health of the organization. Of course, in an unclassified balance sheet these will be lumped together, and it isn’t always necessary to distinguish them — especially if an organization only has liabilities that need to be paid within the next 12 months.
The classified balance sheet shows which equity sections?
A classified balance sheet will generally show both the capital stock of the organization and retained earnings, under shareholder’s equity. The equity portion of the balance sheet will be at the end of the balance sheet, after the assets and liabilities sections. This is also important for investors and banks to know, as they need to know what portion of the organization is in shareholder’s equity and how this might impact their lending.
When would you need a classified balance sheet?
If a bank requests a balance sheet, a classified balance sheet is likely what they need. That being said, there are reasons why you might want an unclassified sheet, too – mostly as an unclassified balance sheet is acceptable under GAAP.
Classified balance sheets depict the same information as an unclassified balance sheet but grouped into short term and long term assets or liabilities, which means that there is always the option of providing a classified balance sheet rather than an unclassified one.
What is an unclassified balance sheet?
An unclassified balance sheet is a balance sheet in which assets and liabilities are not grouped into under short term and long terms headings. An unclassified balance sheet will usually be simpler than a classified balance sheet. Most of the time, when a balance sheet is requested, it is a classified balance sheet that is desired.
What does an unclassified balance sheet look like?
An unclassified balance sheet has assets first, then liabilities, then equity. It’s essentially the same as a classified balance sheet, but it shows lump sums rather than classified entries for what is current and non-current.
Let’s take a look at an unclassified balance sheet:
When would you need an unclassified balance sheet?
Generally, an unclassified balance sheet does not present any subsections. It can make it easier to spot differences in assets and liabilities, such as growth or loss over time. For simpler companies, it may not be necessary to have more than an unclassified balance sheet, at least for internal purposes.
For external purposes, classified balance sheets are usually necessary, at least before closing deals or securing loans. But there can still be a time and a place for an unclassified balance sheet, such as early in on the process of making a deal or to get preliminary information from an investor or other source.
An unclassified balance sheet is simpler and easier to read. For some companies, such as sole proprietorships, the classified balance sheet may not differ much from the unclassified balance sheet. But it’s still important to know the difference between the two for financial reasons and because one may be preferred by a requesting entity.
Can you turn an unclassified balance sheet into a classified balance sheet?
How do you print a classified or unclassified balance sheet?
Most accounting programs will have a “Reports” section that includes “Balance Sheet.” In the settings of these sections, you should be able to select either “Classified” or “Unclassified.” Of course, all transactions will also need to be booked correctly for these reports to be accurate.
If you don’t have your transactions booked, you can consult with a tax professional or a bookkeeper. They will be able to ensure that your assets and liabilities are correct and that your equity (such as your shareholder’s equity) has been booked as it should be.
When properly presented, a balance sheet shows the current financial status of your business. While income and expense reports will show your cash flow, a balance sheet shows your current cash position. That means that it will show exactly how much your company is worth. Balance sheets are frequently used by banks and investors for this reason.
It’s a good idea to have balance sheets for internal use as well, however, as it also shows whether your business is trending upward or downward. The better your balance sheet becomes, the better your company is doing. If your company is slowly building debt and not assets, however, there may be issues with your company’s health.
A balance sheet is one of the most important reports for a business. But not all balance sheets are the same. A classified balance sheet is going to provide far more information than an unclassified balance sheet — and is consequently the type of balance sheet that is most frequently requested.
- A classified balance sheet classes your assets and your debts into current and non-current, thereby producing a more detailed picture of what your organization has now and will have in the future.
- An unclassified balance sheet lumps your assets in with your assets and debts in with your debts, providing a more streamlined, simplified report that may not give the full picture of where your organization stands.
- For investments, loans, and other important activities, you will likely need to provide a classified balance sheet. On the other hand, it’s possible that an unclassified balance sheet can give you the information you need personally at-a-glance.
- It’s important to know whether you need a classified or unclassified balance sheet, but for the most part, a classified balance sheet is going to be the best solution. An accountant or bookkeeper can produce one for your business.