The primary difference between Balance Sheet vs Consolidated Balance sheet is that Balance sheet is one of the financial statements of the company which presents the liabilities and the assets of the company at a particular point of time whereas Consolidated Balance Sheet is the extension of the balance sheet in which along with the items of company’s balance sheet, the items of the subsidiary companies Balance Sheet are also included.
Balance Sheet vs. Consolidated Balance Sheet
There’s a subtle difference between the balance sheet and the consolidated balance sheet. It is in the way both are prepared. The balance sheet Balance Sheet A balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.is prepared by all companies since it is one major financial statement. The consolidated balance sheet isn’t prepared by all companies; rather, companies that have shares in other companies (subsidiaries) prepare a consolidated balance sheet.
Knowing about both of them is important since both are prepared in a different manner. Preparing a balance sheet is easy, and all you need to put in your company’s assets, liabilities, and shareholders’ equity. But in the case of a consolidated balance sheet, you need to include other items like minority interest.
In this article, we discuss the following –
- Balance Sheet vs. Consolidated Balance Sheet [Infographics]
- What is the Balance Sheet?
- What is the Consolidated Balance Sheet?
- Key differences – Balance Sheet vs. Consolidated Balance Sheet
- Balance Sheet vs. Consolidated Balance Sheet (Comparison Table)
Balance Sheet vs. Consolidated Balance Sheet [Infographics]
Balance sheet vs. Consolidated balances sheet differences are as follows –
What is the Balance Sheet?
In simple terms, a balance sheet is a sheet that balances two sides – assets and liabilities.
For example, if ABC Company takes a loan of $10,000 from the bank, in the balance sheet, ABC Company will put in the following manner –
- First, on the “asset” side, there will be the inclusion of “Cash” of $10,000.
- Second, on the “liability” side, there will be “Debt” of $10,000.
So, you can see that one transaction has two-fold consequences which balance each other. And that’s what balance sheet does.
Though, this is the most surface-level understanding of the balance sheet; once you understand it, we can develop this understanding.
Let’s understand assets first.
In the assets section, we will first include “current assets.”
Current assets are assets that can be quickly liquidated into cash. Here are the items we will consider under “current assets” –
- Cash & Cash Equivalents
- Short-term investments
- Trade & Other Receivables
- Prepayments & Accrued IncomeAccrued IncomeAccrued Income is that part of the income which is earned but hasn't been received yet. This income is shown in the balance sheet as accounts receivables.
- Derivative Assets
- Current Income Tax Assets
- Assets Held for Sale
- Foreign Currency
- Prepaid Expenses
Have a look at the example of Amazon’s current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. –
source: Amazon SEC Filings
Non-currents assets are assets that pay off more than a year, and these assets can’t be liquidated in cash easily. Non-current assetsNon-current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark. are also called fixed assets. After “current assets,” we will include “non-current assets.”
source: Amazon SEC Filings
Under “non-current assets,” we would include the following items –
- Property, plant, and equipment
- Intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year.
- Investments in associates & joint venturesJoint VenturesA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.
- Financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.
- Employee benefits assets
- Deferred tax assets
If we add up “current assets” and “non-current assets,” we will get “total assets.”
Again in liabilities, we will have separate sections.
First, we will talk about “current liabilities.”
source: Amazon SEC Filings
Current liabilities are liabilities that you can pay off in the short term. Current liabilities includeCurrent Liabilities IncludeCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. –
- Financial Debt (Short term)
- Trade & Other Payables
- Accruals & Deferred IncomeDeferred IncomeDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc.
- Current Income Tax Liabilities
- Derivative Liabilities
- Accounts PayableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.
- Sales Taxes Payable
- Interests PayableInterests PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company's balance sheet.
- Short Term LoanShort Term LoanShort term loans are the loans with a repayment period of 12 months or less, generally offered by firms, individuals or entrepreneurs for immediate liquidity requirements. These are usually provided at a higher interest rate, these short term loans often have a weekly repayment schedule.
- Current maturities of long term debtCurrent Maturities Of Long Term DebtCurrent Portion of Long-Term Debt (CPLTD) is payable within the next year from the date of the balance sheet, and are separated from the long-term debt as they are to be paid within next year using the company’s cash flows or by utilizing its current assets.
- Customer deposits in advance
- Liabilities directly associated with assets held for sale
Let’s have a look at the current liabilities of Amazon.com.
Now, we will look at long term liabilitiesLong Term LiabilitiesLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). , which are also called “non-current liabilities.”
Noncurrent liabilities are liabilities which the company will pay off in the long run (in more than 1 year time).
Let’s have a look at what items we will consider under “non-current liabilities” –
- Financial Debt (Long term)
- Employee Benefits Liabilities
- Deferred Tax Liabilities
- Other Payables
Below are the non-current liabilities of Amazon.
source: Amazon SEC Filings
If we total “current liabilities” and “non-current liabilities,” we will get “total liabilities.”
Now, we will talk about “shareholders’ equity,” which will come under Liabilities.
Remember the equation of the balance sheetEquation Of The Balance SheetBalance Sheet Formula is a fundamental accounting equation which mentions that, for a business, the sum of its owner’s equity & the total liabilities equal to its total assets, i.e., Assets = Equity + Liabilities?
Assets = Liabilities + Shareholders’ Equity
Shareholders’ equity is the statement which talks about the equity capital of the company. Let’s look at the format to get a better understanding of it –
source: Amazon SEC Filings
If we total “shareholders’ equity” and “total liabilities,” we will get a similar balance, we ascertained under “total assets.” If “total assets” and “total liabilities + shareholders’ equity” don’t match, there’s an error somehow in any financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels..
Also, check out Negative Shareholders EquityNegative Shareholders EquityNegative shareholders equity refers to the negative balance of the shareholder's equity, which arises when the company's total liabilities are more than the value of its total assets. The reasons for such negative balance include accumulated losses, large dividend payments, and large borrowing for covering accrued losses..
What is the Consolidated Balance Sheet?
Let’s say that you have a full-fledged company, MNC Company. Now you saw a small business, BCA Company, which may help you produce goods for your business. So you decide to buy the company as a subsidiary of MNC Company.
MNC Company now has three options.
- MNC Company can let BCA Company run its operation autonomously.
- MNC Company can absorb BCA Company completely.
- Finally, MNC Company does something in between the first and the second option.
However, generally accepted accounting principles (GAAP) don’t give you an option. According to GAAP, MNC Company needs to treat BCA Company as a single enterprise.
Here you need to realize the value of consolidation. Consolidation means you would put together all the assets. For example, MNC Company has total assets of $2 million. MNC Company’s subsidiary BCA Company has assets of $500,000. So in the consolidated balance sheet, MNC Company will put the total assetsTotal AssetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equity of $2.5 million.
This is similar to all sorts of items that will take place on the balance sheet of each company.
Also, check out US GAAP vs. IFRS
Rule of thumb
You may think, how would you decide whether you should prepare a consolidated balance sheet or not? Here’s the rule of thumb you should remember –
If a company owns more than 50% of another company’s share, then the former company should prepare consolidated financial statement for both of these companies as a single enterprise.
Concept of “Minority Interest”
source: Walt Disney SEC Filings
If a company owns 100% of another company, then there’s no complexity. The parent company will create a consolidated balance sheet for parent and subsidiary companies together.
The problem arises when the parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. owns less than 100% of the subsidiary company. In this sort of situation, the parent company consolidates the balance sheet as usual, but in shareholders’ equity, the parent company includes a small section “minority interest.” The idea is to claim all the assets and liabilities and to provide something back in the equity.
For example, if a company owns 55% of another company, a minority interest will be added (in a similar proportion) in the equity section. But all the assets and liabilities will be taken as 100%.
Also, have a look at this detailed guide to Minority InterestDetailed Guide To Minority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making..
An alternative to a consolidated balance sheet
What a parent company does when it owns less than 50% of another company? In that case, the parent company would not create a consolidated balance sheet. Rather, the parent company will only include its own assets, liabilities, and shareholders’ equity. And the portion of interest in the subsidiary company as “investments” in the assets section.
For example, let’s say MNC Company owns a 35% stake in BCA Company. Now, MNC Company will prepare a balance sheet that is not consolidated. And at the same time, there will be no change in the assets, liabilities, and shareholders’ equity. But there will be a 35% stake of investment (the amount would be similar) in the assets section.
Key differences – Balance Sheet vs. Consolidated Balance Sheet
There are few key differences between balance sheet and consolidated balance sheet –
- Balance Sheet is a statement that balances between assets and liabilities. On the other hand, a consolidated balance sheet is an extension of a balance sheet. In the consolidated balance sheet, the assets and liabilities of subsidiary companies are also included in the assets and liabilities of a parent company.
- Balance Sheet is the easiest statement of all four statements in financial accountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.. The consolidated balance sheet, on the other hand, is the most complex.
- To prepare a balance sheet, one needs to look at the trial balance, income statement, cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities., and then can easily sum up two sides of the sheet to balance assets and liabilities. The consolidated balance sheet takes a lot of time because it involves not only the parent company’s balance sheet but also the items in the subsidiary company’s balance sheet. Depending on the percentage of the stake, the consolidated balance sheet is made. If the stake is 100%, a full, consolidated balance sheet is prepared by the parent company. If it’s less than 100% but more than 50%, the parent company prepares the balance sheet differently by including “minority interest.”
- A balance sheet is mandatory. If you own an organization, you must produce a balance sheet at the end of a financial period. The consolidation balance sheet, on the other hand, isn’t mandatory for every company. Even the parent company which owns less than 50% stake in any other company doesn’t need to prepare a consolidated balance sheet. Only the parent company which owns more than 50% stake in other company needs to prepare a consolidated balance sheet.
- If you can understand the concept of the balance sheet, learning a consolidated balance sheet wouldn’t take much time. The consolidated balance sheet is just an extension of a balance sheet.
- Balance sheet and consolidated balance sheet, both are prepared according to GAAP’s accounting principles. The objective is to protect investors from any sort of hassle. Balance sheet and consolidated balance sheet, both are prepared to disclose the right information to potential investors so that they can make a prudent choice about whether to invest in a particular company or not.
Balance Sheet vs. Consolidated Balance Sheet (Comparison Table)
|Basis for Comparison||Balance Sheet||Consolidated Balance Sheet|
|1. Definition – balance sheet vs. consolidated balances sheet||Balance Sheet is an important financial statement of assets, liabilities, and capital for a particular period.||Consolidated Balance Sheet summarizes the financial affairs of parent & subsidiary company.|
|2. Objective||The main objective is to showcase an accurate financial position to external stakeholders.||The main objective is to reflect the accurate financial picture of an organization and its subsidiary.|
|3. Scope||The scope of the balance sheet is limited and narrow.||The scope of the consolidated balance sheet is much broader.|
|4. Equation||Assets = Liabilities + Shareholders’ Equity||Assets of (Parent + Subsidiary) = Liabilities ((Parent + Subsidiary) + Shareholders’ Equity + Minority Interest|
|5. Complexity||The preparation of the balance sheet is very easy.||The preparation of the consolidated balance sheet is much complex.|
|6. Time consumption – balance sheet vs. consolidated balances sheet||The balance sheet doesn’t need a lot of time to prepare.||The consolidated balance sheet takes a lot of time to prepare.|
|7. Key concepts||Assets, Liabilities, & Shareholders’ Equity.||Assets, Liabilities, Shareholders’ Equity, & Minority Interest.|
|8. Adjustment||The balance sheet only balances the asset and the liability side of a single company since there’s no subsidiary.||The consolidates balance sheet balances both parent & its subsidiary company.|
|9. Pre-requisite||Every company needs to prepare a balance sheet.||A company that owns more than 50% share in any other company needs to prepare a consolidated balance sheet.|
Also, check out – Learn Basic AccountingBasic AccountingAccounting is the formal process through which a company attempts to present its financial information in a way that is both auditable and usable by the general public. in less than 1 hour.
Conclusion – Balance Sheet vs. Consolidated Balance Sheet
The basic difference between the balance sheet and consolidated balance sheet is that in a consolidated balance sheet, there is the inclusion of another company (which we call subsidiary). And that’s why the whole process gets complicated.
As a parent company, you may decide to do otherwise (for example, not preparing the consolidated balance sheet and letting the subsidiary company operate their own business); but you’re bound by the accounting principlesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts. of GAAP. And that’s why you need to prepare a consolidated balance sheet if you own a stake of more than 50% in the subsidiary company.
I hope you understood the key differences between the balance sheet and the consolidated balance sheet. Which companies did you come across where you analyzed the two types of balance sheet separately? Do tell me about it in the comments!
Balance Sheet vs. Consolidated Balance Sheet Video
This has been a guide to the Balance Sheet vs. Consolidated Balance Sheet. Here we discuss the top difference between balance sheet and consolidated balance sheet along with infographics and comparison table. You may also have a look at the following articles –