Financial statements are extremely important from a business point of view. Whether you’re a large scale multinational corporation or a small and medium enterprise, knowing and preparing financial statements can benefit your company. Financial statements help business owners understand how the business is doing, what sectors are doing well and what future actions need to be taken to grow the business.
There are three main types of financial statements – Cash Flow, Profit and Loss Statement and the Balance Sheet. A balance sheet is a statement that reports the company’s assets, liabilities and equity at a given point of time, usually the end of a financial year. A Comparative Balance Sheet is a statement that considers the balance sheet of two or more time periods.
While all three financial statements are necessary to make and analyse, in this article, we’re going to discuss a comparative balance sheet, why it is needed, and finish it off with an example.
What is a Comparative Balance Sheet
A comparative balance sheet is a financial statement that compares the business’s revenue, cash flow, profits, and other financial metrics from the previous years to the current year. The comparison is limited to previous years and from one time period to another time period or from one company to another company.
It helps compare from where the business has started to where it is going, the business trend, and what particular actions need to be taken to ensure the business is headed that way. This is essentially what a comparative balance sheet aims to do.
Purpose of Comparative Balance Sheet
Financial analysts make comparative balance sheets between two or more time periods to understand how the business has grown over time. What changes are working for the business? What ideas are not working for the business, and what actions need to be taken to ensure growth and profitability.
Sometimes, financial analysts also make comparative balance sheets between two different companies in the same sector to understand how the competitors are doing, what they are doing differently, and how that impacts their overall balance sheet and company performance.
The purpose of a comparative balance sheet is to make executive decisions about the company’s future based on past and current business performance. Any owner, at whatever scale, should always aim to make a comparative balance sheet to grow and scale the business.
Components of a Comparative Balance Sheet
A comparative balance sheet includes assets, liabilities and equity of a business, just like a general balance sheet, but compared over two or more time periods or two or more companies.
|Liability and Equity
|Current Assets : Cash Accounts, Receivable, Inventory
|Current Liabilities : Accounts, Payable Accrued Expenses
|Long Term Assets : Fixed Assets, Long Term Investments
|Long Term Liabilities : Long term debt, Other long term debt
|Equity : Common Stock, Retained Earnings
Difference Between Balance Sheet and Comparative Balance Sheet
A balance sheet is a financial statement that reports a company’s assets, liabilities, and equity in a financial year. It helps understand the business’s current position, how the business has done in the financial year, and the final position of the assets and liabilities in that financial year. On the other hand, a comparative balance sheet contains all the balance sheet elements but compares the balance sheets for two or more periods. It also compares the balance sheets of subsidiaries of the same company or companies of the same industry.
Format of a Comparative Balance Sheet
The comparative balance sheet has various numbers, ratios and other financial information. Just reading the comparative balance sheet is not enough, one needs to understand and analyse the information to make better decisions. There is usually a set format of the comparative balance sheet that is followed globally.
An example of a comparative balance sheet looks something like this:
|Changes in absolute value
|Changes in percentage terms
|Equity and Liabilities
|Reserves and surplus
|Cash and Bank
This is what a comparative balance sheet looks like on a very basic level. Of course, this is only for representation purposes, but the idea behind the example is to understand that the above balance sheet is being compared over two years, and it is being noticed how the assets, liabilities and equities have increased or decreased over time in absolute terms as well as in percentage terms.
Advantages and Disadvantages of a Comparative Balance Sheet
|Comparison: The best way to analyse how the business is doing is by seeing how much better is it doing than the previous period. A comparative balance sheet can show this.
|Understanding: To understand a comparative balance sheet, one needs to have a fair understanding of financial statements and business analysis.
|Trend Analysis: It shows the trend of a company over a time period as it puts together data of several years.
|Uniformity: Not every company globally uses the same accounting methods, due to which it is not possible to compare a company if they use different accounting principles.
|Company performance: It helps compare the company’s performance to the industry and other individual companies in the same sector.
Comparative balance sheets are made to understand a business’ situation, make decisions about the future, and understand how the business is doing compared to the sector.
Making a comparative balance sheet and understanding it can be very beneficial for you and your business. It helps your business grow and ensures you’re always on top of trends.
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