Question

On a classified balance sheet, a company should report separately?

1) Assets that differ in their type or expected function.
2) Assets and liabilities with different implications for the company's financial flexibility.
3) Assets and liabilities with different general liquidity characteristics.
4) All of these answer choices are correct.

Answer 1

On a personal balance sheet, bank deposits are assets and loans are liabilities. For a bank, however, these classifications are reversed: deposits are liabilities and loans are assets. This is because deposits are funds owed by the bank, and loans represent future income.

Step-by-step explanation:

The question asks us to explain the difference in how bank deposits and loans are characterized as assets and liabilities on a personal balance sheet compared to a bank's balance sheet. On a personal balance sheet, bank deposits would typically be classified as assets because they represent funds you can use—they are a value that you own. Conversely, loans that you have taken out would be classified as liabilities, as they are debts you owe to the lending institution.

However, on a bank's balance sheet, these classifications are reversed. Bank deposits are considered liabilities for a bank because these are funds the bank owes to its depositors. On the other hand, loans are considered assets to a bank, as these are monies that the bank will receive in the future from the borrowers, along with interest payments, which constitute the bank's earnings. Essentially, what is an asset to you (bank deposit) is a liability to the bank, and what is a liability to you (loan) is an asset to the bank.