Balance Sheet Formats and the Classified Balance Sheet

The balance sheet format summarizes the balance sheet accounts into assets, liabilities and owners’ equity.

The balance sheet format helps the user by grouping these accounts into classes such as the function of the account, the business use of the resources, and whether resources and liabilities are short-term or long-term. This balance sheet format is called the classified balance sheet.

The balance sheet lists assets in descending order of liquidity, with the most liquid assets listed first.

For example, Sunny Sunglasses Shop lists the current assets in order of liquidity, or how quickly the asset can be converted to cash.

Assets listed in descending order of liquidity

CashAccounts ReceivableInventoryPrepaid Expenses

Cash is the most liquid of assets, but also may include treasury bills, money market funds, short-term loans, and certificates of deposit (CD’s).

Accounts receivable are what customers owe the company for products or services delivered on credit. Accounts receivable are less liquid than cash, but are expected to be collected within 30 to 60 days per payment terms.

Inventory is product for sale and is the next liquid asset because it is expected to be sold and converted to cash within one year.

Finally, prepaid expenses are those expenses that are already paid for future services not yet received. Typical prepaid expenses are prepaid insurance and prepaid rent. Prepaid expenses are assets because they represent cash payments already made for services not yet received.

Following the current assets are the non-current assets.

Non-current assets are also listed in order of liquidity. For example, companies list investments that are intended to be held for longer than one year as a non-current asset in the balance sheet accounts.  Long-term investments include stocks, bonds, mutual funds, and long-term notes receivable.

Following investments are fixed assets, also called property plant and equipment (PP&E).

Fixed assets include office equipment, furniture, vehicles, machinery, buildings, and even land. Fixed assets are productive assets that are not intended for sale, but are employed to support the production or the sale of product or services.

Following fixed assets are nontangible assets such as patents, copyrights, logos, and other legal rights that are expected to provide long-term future benefits to the company. Nontangible assets also include goodwill, or the amount paid for a company over its net book value.

The balance sheet format similarly lists liabilities as current liabilities, those liabilities or obligations that will come due within one year of the balance sheet date, and long-term liabilities that will remain outstanding for longer than one year. The short-term portion of the long-term liability, however, is listed as a current liability on the classified balance sheet format.

For example, Sunny’s mortgage on the land is considered a long-term liability, but the $900 due within one year is listed as a current obligation on the classified balance sheet format.

LIABILITIES AND OWNERS’ EQUITYCurrent Assets (Cash, A/R, Inventory)Current Liabilities (Accounts Payable, Current debt)

The balance sheet format allows the financial statement user to quickly see which assets are short or long-term assets, and what the assets are comprised of in the business.

Assets are divided into two broad categories on the accounting balance sheet: current assets and noncurrent assets. Current Assets, or short-term assets, are cash and other assets that can be reasonably expected to be converted to cash or consumed during one year. Examples are cash, inventory, and accounts receivable. Accounts receivable results from the sale of goods or services on account. It represents a claim to cash that is expected to be received within one year.NonCurrent assets, or long-term assets, are not expected to be consumed or converted to cash within a year. Examples are buildings, land, and equipment.

In the above example, cash is a current asset, and land is a noncurrent asset.

Intangible assets do not have physical substance. They are valuable because of the rights and privileges they convey to the business. Examples are patents, copyrights, and trademarks. Intangible assets add long-term value to the company and are not expected to be consumed within a year, so they are classified as noncurrent assets.

The balance sheet format also allows the user to quickly see which liabilities are short or long-term liabilities, and what the liabilities are comprised of in the business.

Like assets, liabilities are divided into two broad categories on the accounting balance sheet: current liabilities and noncurrent liabilities. Current Liabilities, or short-term liabilities, are those liabilities that are expected to be paid within one year. Examples are accounts payable, current portions of long-term debt, and short term notes payable. Accounts Payable represents a short-term debt mainly from the purchase of inventory. Accounts payable may also include the purchase of goods, services, and supplies on credit.Long-Term Liabilities are not expected to be paid within a year. Examples are long-term notes such as a mortgage or lease. For corporations, long-term liabilities may also include bonds payable, pensions payable, and deferred taxes.

In the below classified balance sheet for Sunny Sunglasses Shop, a portion of the mortgage, $900, is a short-term liability because it is due within one year. The remaining balance of $17,100 is not payable within one year and is classified as a long-term liability.

Sunny Sunglasses Shop
Balance Sheet Format
January 31, 2010

Balance Sheet Format