Common Size Balance Sheet
What is a Common Size Balance Sheet?
A common size balance sheet is a balance sheet that shows both the numeric value and relative percentage for total assets, total liabilities, and equity accounts. Common size balance sheets are utilized by internal and outside analysts and are not a reporting requirement of generally accepted accounting principles (GAAP).
How Common Size Balance Sheets Are Used
A common size balance sheet takes into consideration the relative percentage of every asset, liability, and equity account to be immediately broke down. Any single asset detail is compared to the value of total assets. In like manner, any single liability is compared to the value of total liabilities, and any equity account is compared to the value of total equity. Thus, each major classification of account will approach 100%, as all more modest parts will amount to the major account classification.
Common size balance sheets are not required under generally accepted accounting principles, nor is the percentage data introduced in these financial statements required by any regulatory agency. Albeit the data introduced is helpful to financial institutions and different lenders, a common size balance sheet is regularly not required during the application for a loan.
Albeit common-size balance sheets are most ordinarily used by internal management, they additionally give helpful data to outer parties, including independent auditors. The most important part of a common size balance sheet is that it upholds simplicity of comparability. The common size balance sheet shows the cosmetics of a company's different assets and liabilities through the introduction of percentages, notwithstanding absolute dollar values. This manages the cost of the ability to rapidly compare the historical trend of different details or categories and gives a baseline to comparison of two firms of various market capitalizations. Also, the relative percentages might be compared across companies and industries.
Illustration of a Common Size Balance Sheet
A company has $8 million in total assets, $5 million in total liabilities, and $3 million in total equity. The company has $1 million in cash, which is part of its total assets. The common size balance sheet reports the total assets first arranged by liquidity. Liquidity alludes to how rapidly an asset can be transformed into cash without influencing its value.
Thus, the top line of the financial statement would list the cash account with a value of $1 million. Moreover, the cash addresses $1 million of the $8 million in total assets. Subsequently, alongside reporting the dollar amount of cash, the common size financial statement incorporates a column which reports that cash addresses 12.5% ($1 million partitioned by $8 million) of total assets.