Common Size Balance Sheet: Meaning, Objectives and Format of Common Size Balance Sheet

A Vertical Analysis of Financial Statements of a company, in which the amount of individual items of a Balance Sheet of Statement of Profit & Loss are written, is known as a Common Size Financial Statement. The amounts written are then converted into percentage by taking a common base; which is, Revenue from Operations or Net Sales in case of Statement of Profit & Loss and Total Assets or Total Equity and Liabilities in case of a Balance Sheet. The percentages calculated by taking the respective common bases are then compared with the corresponding percentages of other periods, through which meaningful conclusions can be drawn. A Common-size Statement can be prepared for inter-firm and intra-firm comparisons or a Balance Sheet and Income Statement. 

Common-size Statements are accounting statements expressed in percentage of some base rather than rupees.

– Kohler

What is a Common Size Balance Sheet?

A statement that shows the percentage relation of each asset/liability to the total assets/total of equity and liabilities, is known as a Common-size Balance Sheet. To express the amounts as the percentage of the total, the total assets or total equity and liabilities are taken as 100. With the help of a Comparative Common-size Balance Sheet of different periods, one can highlight the trends in different items. If a Common-size Balance Sheet is prepared for the industry, it facilitates the assessment of the relative financial soundness and helps in understanding the financial strategy of the organisation. 

Objectives of Common Size Balance Sheet

Different objectives of a Common-size Balance Sheet are as follows:

1. The basic objective of a Common-size Balance Sheet is to analyse the changes in the individual items of a Balance Sheet.

2. It is also prepared to see the trends of different items of assets, equity and liabilities of a Balance Sheet. 

3. Lastly, it is prepared for the assessment of the financial soundness of the organisation and to understand its financial strategy.

Preparation of Common Size Balance Sheet

A Common-size Balance Sheet has the following six columns:

1. First Column: In the first column, the items of the Balance Sheet are written.

2. Second Column: In the second column, Note No. given against the line item is written.

3. Third Column: In the third column, the amounts of different items; i.e., assets, equity, and liabilities of the previous year are written.

4. Fourth Column: In the fourth column, the amounts of different items; i.e., assets, equity, and liabilities of the current year are written.

5. Fifth Column: In the fifth column, the percentage relation of the different items of the previous year’s Balance Sheet to the Total of Equity and Liabilities/Total Assets are written. Here, the Total of Equity and Liabilities/Total Assets are taken as 100. 

6. Sixth Column: In the last column, the percentage relation of the different items of the current year’s Balance Sheet to the Total of Equity and Liabilities/Total Assets are written. Here, the Total of Equity and Liabilities/Total Assets are taken as 100.

Format of Common Size Balance Sheet

Note: The Common-size Balance Sheet does not include line items of the Balance Sheet, the accounting treatment of which are not to be evaluated.

Illustration:

From the following Balance Sheet of Shreya Ltd. as at 31^st March 2020, prepare a Common-size Balance Sheet:

Solution: