Alright. So let's dive a little bit into the concept of a classified balance sheet. We've talked about a balance sheet before. Right? The balance sheet is what shows the assets, liabilities, and equity at a point in time, right? This is at a point in time. It's a snapshot of the company that kind of just shows us at this moment how much cash we have, how much inventory we have, how much we owe to our suppliers, and how much is owned by our stockholders, right? So it shows, at that moment, the assets, liabilities, and equity. What we're going to do is take our balance sheet and call it a classified balance sheet. We're going to split up our assets and liabilities into two categories. We might have talked about this already a little, but I just want to go through a little more details. First, we have our current assets. Current assets are assets that can or will be converted into cash within one year. So that defines a current asset. Current assets are generally cash, obviously, because it's already cash or things like accounts receivable, money owed from customers, inventory, that's money that we have sitting in goods that we're waiting to sell. We would expect to sell those within a year generally. So things like that are going to be our current assets.
Now let's talk about long-term assets. Long-term assets are things that we are going to use for multiple years. So it's when we're going to use something for longer than one year. This one-year threshold is the cutoff point for current versus long term. Long-term assets are going to be things like machinery, land, buildings, patents that we might have on our products, and these are going to last more than just one year.
The same principle applies to liabilities except, well, the same but the opposite, right? Current liabilities are money we have to pay within one year. There's going to be some sort of outflow within the next year. That's going to be things like accounts payable or any sort of short-term debt that we have that we're going to have to pay back soon. Compare that to long-term liabilities, and these are liabilities that will not be paid back for more than one year. So that could be like a long-term loan that we obtained from the bank for 20 years, something like that. That's going to be a long-term liability.
One last thing I want to note is that we're going to present our current assets in the order of liquidity, okay? We're going to start with the most liquid. The term liquidity just means how easily we can convert it into cash. Cash is already very liquid because it is cash. We're going to show them from most liquid to least liquid, starting with cash. Cash is the most liquid. Generally, we're going to think that accounts receivable would be the second most liquid because that's money we've lent to customers that maybe have a 30-day pay period, they're going to pay us pretty soon. Before accounts receivable, I forgot about this little one, there's one that comes up every now and then, and it is Marketable Securities. I want to put that one in before accounts receivable because marketable securities, like a share of stock or a bond or some sort of investment that you made, could be sold very easily. Marketable means it can be put on the market, and a security is any kind of investment. So imagine you had a share of Apple stock that's very liquid. If you wanted to sell that share of Apple stock you could do that right away, you could get the price on Google, know what it's worth, and you could sell it. So marketable securities are very liquid. They're just a little less liquid than cash because cash is already cash. After marketable securities come accounts receivable. Accounts receivable, we have to wait for the customers to pay us, but it's generally going to be pretty soon. After accounts receivable, we have inventory. Inventory is like merchandise that we have - just goods sitting in boxes in our warehouse waiting. So inventory is going to be pretty liquid as well. Finally, we're going to have prepaid expenses. We might have mentioned this before, but prepaid expenses, when you pay an expense in advance. For instance, getting an insurance policy that's going to last several years, but you paid it all upfront. While that's still an asset, at least the current part of it, let's say it's going to last for one year, because remember current assets have to be one year, well these prepaid expenses are going to be current assets, and it's going to take all year for it to basically be converted into cash or converted into the equivalent of cash since we already paid it in advance.
So here I have a balance sheet for an example company, no real company here, but this is what you might see. Notice under our assets, we start with our current assets right here, and then we go to our fixed assets, our long-term assets to get to our total assets. Notice that our current assets are shown in the order of liquidity. We start with cash, then marketable securities, then accounts receivable, inventory, and prepaid expenses in that order. Notice that if the company doesn't have marketable securities, it's not listed. If they didn't have any accounts receivable, that wouldn't be listed, but we would still keep the same order of liquidity. So that's basically it. Notice here on the liability side, we also split it up into current assets, long-term assets. This is a classified balance sheet because it splits up the assets and liabilities between current and long term. Pretty basic stuff, we've talked about a lot of that before, but let's go ahead and move on to the next video.
