As a business owner, you’re probably familiar with different financial statements and what they indicate about your business.
Cash flow statements, profit and loss statements, tax returns, and balance sheets are all different reports that break down your business’s finances for their own specific purposes.
You may have also heard of a “classified balance sheet.”
If you’re not sure what a classified balance sheet is, you’re in the right place.
In this blog, we’ll explain what a classified balance sheet is, discuss how it’s different from an unclassified balance sheet, and explain why a classified balance sheet is generally more useful.
Classified Balance Sheet Defined
There’s a good chance you already know what a classified balance sheet is. You’re probably just unfamiliar with the term itself.
A classified balance sheet serves the same purpose as a balance sheet: it provides a snapshot of your business’s total assets, liabilities, and equity.
The only difference between a classified and unclassified balance sheet is that a classified balance sheet “classifies” assets, liabilities, and equity into more specific categories.
For example, rather than including one “assets” category, a classified balance sheet may break down assets into current and fixed assets. It may also separate assets that are normally added together, such as FF&E, into how much is tied specifically to furniture, specifically to fixtures, and specifically to equipment.
Even though the categories on a classified balance sheet are organized differently, it still follows the accounting equation:
Assets = Liabilities + Equity
There is no set standard for the different line items that should be included in a classified balance sheet: some are far more detailed than others.
It all depends on who generates the balance sheet, and who the target audience is.
Classified Balance Sheet vs Unclassified Balance Sheet Examples
To further illustrate the difference between a balance sheet and a classified balance sheet, let’s compare the two in an example.
Unclassified Balance Sheet
Generally broken down into total assets, total liabilities, and total equity, the unclassified balance sheet contains fewer categories than its classified counterpart.
An unclassified balance sheet could be beneficial when only a high-level overview of the balance sheet is necessary.
Classified Balance Sheet
Notice the additional categories present in the classified balance sheet, which may even look more familiar to you than the unclassified version.
The different categories in a classified balance sheet help provide more readily available information concerning the business’s performance, as opposed to the more general categories in an unclassified balance sheet.
If you’re selling your business, for example, it’s common for a buyer to use some sort of financing (usually through the SBA) to purchase your business.
When this is the case, the bank servicing the buyer's loan will want to see current assets divided by current liabilities to determine the business’s ability to pay short term obligations (also known as “current ratio” or "working capital ratio").
The classified balance sheet simply makes this information more accessible.
Generally speaking, a classified balance sheet will be more useful in almost every scenario.
The detailed categorization of your business’s assets and liabilities in a classified balance sheet will help anyone viewing your balance sheet easily access the specific information they need.
Contrastingly, if you want a quick snapshot of your business’s performance, an unclassified balance sheet could be more easily digestible.
Your business’s balance sheet is just one of many documents that will be requested when you decide to sell your business.
In general, buyers interested in your business will also want to see the last three years of financials, so it’s important to understand how to prepare them before listing your business.
If you’re ready to sell your business, or you’re just curious about the process, contact us today. We’d love to help you get started.