Comparative Balance Sheet Meaning
The comparative balance sheet is a balance sheet which provides financial figures of Assets, Liability and equity for the “two or more period of the same company” or “two or more than two company of same industry” or “two or more subsidiaries of same company” at the same page format so that this can be easily understandable and easy to analysis.
The comparative balance sheet has two-column of amount against each balance sheet items; one column shows the current year financial position, whereas another column will show the previous year’s financial position so that investors or other stakeholders can easily understand and analyze the company’s financial performance against last year.
Example Format of Comparative Balance Sheet
Below is the example format of a comparative balance sheet.
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Below is the format of a comparative balance sheet of Amazon Inc for the year 2018 and 2017. In this balance sheet, the Financial Position of the year ended 2018 and 2017 are mentioned in columns 2018 and 2017, respectively. After that, there is two-column, the first column is showing the change in absolute term, and the second column is showing the change in % term.
After analyzing the above balance sheet, some observation is as below:
- The company’s share capital is the same for both the year. It means the company has not issued any share for the current year.
- The company’s reserve & surplus has been increased by $ 5000, i.e., by 25%. It shows a company has earned profit and added into reserve & surplus.
- Long term borrowing has been reduced by $ 5000, i.e., by 14%, it means the company has paid off $ 5000 loan.
- Fixed Assets have been reduced by $ 10000 because of depreciation.
- Inventory has been reduced by $ 9000, and Trade receivable has been increased by $ 10000, which means the company has sold his stock to customers, and the amount is yet to receive.
- On analyzing the current ratio, we found the current ratio has been increased by $0.04 as compared to last year, which means the company has given a good performance this year as compared to the previous year.
Note: –
These are basic analyses with the help of a comparative balance sheet, which helps us to understand its importance.
Advantages of Comparative Balance Sheet
- Comparison – It is effortless to compare the figures for the current year with the previous years because it gives both the year figures in one place. It also helps to analyze the figures of two or more companies or two or more subsidiaries of one company.
- Trend Indicator – It shows the company’s trend by putting several year’s financial figures at one place like an Increase or Decrease in profit, current assets, current liabilities, loans, reserves & surplus, or any other items which help to the investors for making their decision.
- Ratio Analysis – Financial ratio is to derive from the balance sheet items, and the comparative balance sheet financial ratio of two years of two companies can be derived and analysis the financial status of the company. Like the current ratio is derived by the help of current assets and current liabilities, if the current ratio of the current year is more than the last year, it shows the company liabilities have been reduced from last year against the current assets.
- Compare Performance with the Industry Performance – Helps to compare the one company’s performance with the other company or with the average performance of the industry.
- Helps in Forecasting – It also helps in forecasting because it provides the past trend of the company based on which management can forecast the financial position of the company.
Limitation/Disadvantages
- Uniformity in Policy and Principles – Comparative balance sheet will not give the correct comparison if two companies have adopted different-different policies and accounting principles while preparing the balance sheet or if the same company has adopted different – different accounting methods in two additional years.
- Inflationary Effect not Considered – While preparing the comparative balance sheet inflation effect has not been considered; therefore, the only comparison with the other balance sheet will not give the correct picture of the company’s trend.
- Market Situation and Political Conditions not Considered – While preparing the comparative balance sheet, marketing conditions, political environment, or any other factor which may affect the business of the company are not considered it only gives the result of the company; therefore, it will not give the correct picture every time, e.g., if in current year overall economy is going down or political condition is also not stable as compared to last year this leads to decrease in demand and overall company sale will de-growth because of this reason and not because of company performance.
- Misleading Information – Sometimes, it gives misleading information and misguides the person who read the comparative balance sheet. E.g., if any product is not available for last year and the same is available for the current year, then it will show a 100% change over the previous year; for that, we need to read the complete financial statement, not only a comparative balance sheet.
Conclusion
Comparative Balance Sheet is a balance sheet of “two or more than two years” or “two or more than two company” which helps investors and other stakeholders to analyze the company performance & trend of the company, which helps them to make the decision and forecasting. At the same time, there are some limitations of this comparative balance sheet like uniformity in accounting practices, the inflationary factors which need to be taken care of at the time of analyzing the balance sheet.
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