What Is the Purpose of a Classified Balance Sheet?
A classified balance sheet organizes or classifies balance sheet accounts into a format easily understood by the reader. The classified balance sheet provides important information to the business owner about the company's resources, liabilities and the owner's equity. This information is essential to the business owner in making informed financial decisions for the organization.
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Assets
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Assets are defined in the classified balance sheet as current and non-current. Current liabilities can easily be turned into cash within one year such as inventory, cash on hand and accounts receivable. Non-current assets include items such as equipment long-term investments such as bonds. Non-current assets cannot readily be sold, exchanged or turned into cash within one year. Another form of assets are called intangible assets. These assets hold value even though they cannot be physically seen. Intangible assets include such items as copyrights, brand recognition or a company's reputation.
Liabilities
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Liabilities are classified on the balance sheet as current and non-current liabilities. Current liabilities must be satisfied within one year. Current liabilities are normally paid using current assets and include such items as short-term loans, employee wages, accrued expenses and accounts payable. Non-current liabilities are those not expected to be paid within one year. Non-current liabilities include long-term debt, lease obligations, employee pension plan obligations and tax liabilities.
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Owner's Equity
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The business assets belonging to the owner are defined as the owner's equity. The owner's equity is calculated by subtracting the liabilities of the business from its assets. The way owner's equity is reported on the classified balance sheet depends upon the company's organizational structure. A sole proprietorship reports the owner's equity as a single capital account, while partnerships show capital accounts for each partner. Corporations report owner's equity as retained earnings. The owner's equity gives a picture of the company's profitability.
Analysis
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A careful analysis of a company's assets, liabilities and the owner's equity helps an owner make important business decisions such as whether or not to loan money or to buy another company. Liabilities directly influence business decisions. The daily cash flow available to the company must also be factored in.
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References
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