A balance sheet presents the sources of money (Liabilities and Owners’ Equity) and the uses (Assets) of a business. In general, for public financial disclosers under standard accounting principles (like GAAP, IFRS) there is only one type of balance sheet.
But companies whether they are private or public on the other hand, can establish various internal balance sheet based on their preferences. Management accountants generate internal financial records regularly, and are not regulated because the users are their management.
There are many different types of balance sheets companies can pick from. The two key types are the classified balance sheet and vertical balance sheet which we will discuss below:
Classified Balance Sheet
This format groups information about liabilities, an entity’s assets, and equity into subcategories of accounts (or classifies it). It is the most common balance sheet presentation, and it does an excellent job of merging many different funds into a readable format. To make data more comparable, accountants should present balance sheet data in the same classification structure throughout various periods.
A classified balance sheet divides asset, liability, and equity accounts into manageable divisions for the reader’s advantage. To put it another way, it breaks down each of the balance sheet accounts into smaller sections, making the report more valuable and informative.
There is no set of subcategories to use or a minimum amount that must be used. Management can use whichever categories they like, but the most common are current and long-term.
It excels at combining a huge number of different accounts into a user-friendly interface. To make data more comparable, accountants should present balance sheet statistics in the same classification structure throughout various periods.
Vertical Balance Sheet
This type is shown as a single column of data, with assets appearing first, liabilities appearing second, and shareholders’ equity appearing last. Within each of these categories, line items are shown based on their liquidity (how fast they can be turned to cash).
For example in the asset side, it begins with cash and ends with non-current assets, which are considerably less liquid than cash or credit. For the same basis, the liabilities section is often ordered from accounts payable to long-term debt.
A vertical balance sheet is intended to allow the reader to examine all of the balance sheet information at the same time. Comparing total current assets to entire current liabilities to establish a company’s financial status as of the balance sheet date.
Other Useful Ways to Present the Balance Sheet
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Comparative Balance Sheet
A comparative balance sheet can show the balance sheet each year for the past XX years (based on organisation preference) and could be used to demonstrate how things have changed over time.
Comparative balance sheets show if a company’s net worth is increasing or decreasing and whether its debt commitments are decreasing.
It is also possible to generate a classified comparative balance sheet. A comparative balance sheet is a financial statement that depicts an organisation’s financial situation across a period for which a comparison is made or is required. The financial position is compared with two or more periods to indicate the trend, direction of change, appraisal, and relevant measures.
Given the importance of the comparative balance sheet, most organisations in various business sectors prepare one compared to their competitors as a benchmark.
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Common size balance sheet
A common size balance sheet presents the information of the balance sheet as a percentage of the total assets for the asset line and percentage of total liabilities and owners’ equity for their corresponding side.
It is another way that can assist the analyst to identify the percentages and compare it historically and between different businesses.
Final Thoughts
Building and managing balance sheets is crucial for every business, whichever type is there, however, we should always keep in mind that is is a utility and every business have their own way in preparing and interpreting their information.
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