The Classified Balance Sheet

By Jeff Boulton

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Contents:

1. Why Are We Changing the Balance Sheet?

2. How do we make a Classified Balance Sheet?

 a. The Balance Sheet is Verticle b. Accounts are Categorized and Classified c. There are Three Columns d. The Owner's Equity Section is Expanded

3. What the Classified Balance Sheet Tells You

4. Practice Exercise

Why are we changing the Balance Sheet?

In this lesson we are changing the following step in the accounting cycle:

Thus far we have used a balance sheet that is arranged in the same fashion as the accounting equation – that is, Assets on the left, Liabilities and Equity on the right, just like the one shown below.

Our needs however, have surpassed this simple format. There are three major reasons:

1. We have several contra-accounts that we need to show and sub-total on the balance sheet. This requires a balance sheet with multiple columns
2. As we begin to require more specific information for analysis and reporting, we need to categorize, and classify certain accounts into particular groups.
3. Lastly, we can’t balance anymore using the old method! Remember the “Capital” account is the balance from the beginning of the period. All changes to Owner’s Equity have been channelled into the Drawings, Revenue, and Expense accounts and thus are missing from Capital. (If you recall, this is why we had to transfer the net income number on the worksheet at the bottom click here to review).

How do we make a Classified Balance Sheet?

There are four really big changes:

1. The Balance Sheet is vertical
2. There are three columns
3. Accounts are more clearly categorized and classified
4. The Owner’s Equity section is expanded, and includes a line for Net Income and Drawings.

1. The Balance Sheet is Vertical

What we are doing is moving the asset section to sit on top of the rest of the other two sections as show below.

That’s it really. Total Assets must still equal Total Liabilities and Owner’s Equity. It’s just vertical, that’s all.

2. Accounts are Categorized and Classified

Though you may be aware of the classification of short-term and long-term assets and liabilities, now we physically show them as separate on the Balance Sheet. The presentation breaks down as follows:

3. There are Three Columns

Generally, we place certain items in certain columns. As a rule of thumb, in…

Construction of the Classified Balanced Sheet

Now that you know classification and column use, we will begin to construct a New Classified Balance Sheet section by section before we cover item 4, which is the equity section.

The first section is Assets. Remember this is divided into short-term and long-term assets. Short term assets are called Current Assets. We have one contra account to deal with here; it is the Allowance for doubtful accounts

Now let’s look at the section for fixed assets.

So now this gives us the top portion of the Balance Sheet: the asset section, which looks like this:

The next section is liabilities. Remember, this too is now divided into short-term and long-term sections.

The long-term section is constructed as:

4. The Owner’s Equity Section is Expanded

This leaves us with the trickiest part. The Owner’s Equity section.

When you put this section all together it looks like this:

Note how in the balance sheet above not every value has a dollar sign. In general, the rule of thumb for dollar signs is:

Place dollar signs on the first number in each column, for each section, and final totals

If you now wish to download a high-resolution JPEG image of the completed Balance Sheet we just went through, click the following link:

Classified Balance Sheet

What the Classified Balance Sheet Tells You

Soon you will have to perform financial analysis on the Balance Sheets and Income Statements of companies.

By classifying the accounts on a Balance Sheet, this analysis becomes much, much easier. It will allow you to quickly find and calculate numbers that you will require.

Click on the arrows in the middle of the Balance Sheet we just finished below to see how:

Practice Exercise

Use the completed worksheet below to prepare a Classified Balance Sheet.

Worksheet and Balance Sheet

NOTE: If you prefer, you can do it by hand. You can print out your own accounting paper at any time by using this file:

Accounting Paper