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 itemsBalance Sheet ItemsAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.read more; 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.
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.
| Current Ratio Analysis | 2018 | 2017 |
|---|---|---|
| Current Assets | 85000 | 74000 |
| Current Liabilities | 55000 | 49000 |
| Current Ratio | 1.5 | 1.5 |
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For eg:
Source: Comparative Balance Sheet (wallstreetmojo.com)
After analyzing the above balance sheet, some observation is as below:
- The company’s share capital Share CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more 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 AssetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more have been reduced by $ 10000 because of depreciation.
- Inventory has been reduced by $ 9000, and Trade receivableTrade ReceivableTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more 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 ratioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it' short-term loans within a year. Current ratio = current assets/current liabilities read more, 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 ratioFinancial RatioFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more 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 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.read more and current liabilitiesCurrent LiabilitiesCurrent 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.read more, 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 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.read more, 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 practicesAccounting PracticesAccounting practice is a set of procedures and controls used by an entity's accounting department to keep track of accounting records and entries. Other reports are generated based on accounting records, such as financial statements, cash flow statements, fund flow statements, payroll, tax workings, payment and receipts statements, and so on, and they form the basis of the auditor's reliance while auditing the financial statements.read more, the inflationary factors which need to be taken care of at the time of analyzing the balance sheet.
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