Common Size Balance Sheet

What is a Common Size Balance Sheet?

A common size balance sheet is one that has an additional column showing each monetary amount as a percentage of the total assets of the business. The common size balance sheet is not required by Accounting Standards, and is used more as a management tool rather than a formal reporting document.

There is no set format to the common size balance sheet, but it is best to keep the same balance sheet format required by accounting standards, and then add an additional column to the right representing the percentage of total assets.

Example of Common Size Balance Sheet

A typical layout is shown in the example below. This example shows a vertical common size balance sheet with the right hand column showing each line item as a percentage of total assets.

Vertical Common Size Balance Sheet at 31 March XXX
Amount %
Cash 14,259 6.9%
Accounts receivable 57,263 27.7%
Inventory 1,764 0.9%
Current assets 73,286 35.4%
Long term assets 133,714 64.6%
Total assets 207,000 100.0%
Accounts payable 22,367 10.8%
Other liabilities 21,291 10.3%
Current liabilities 43,658 21.1%
Long-term debt 39,793 19.2%
Total liabilities 83,451 40.3%
Capital 19,764 9.5%
Retained earnings 103,785 50.1%
Total equity 123,549 59.7%
Total liabilities and equity 207,000 100.0%

In a common size balance sheet the right hand column shows each line item as a percentage of total assets. For example, current assets are shown in the balance sheet at a value of 73,286, and the total assets are shown as 207,000. As a percentage, current assets represents 73,286/207,000 = 35.4% of total assets.

From the accounting equation, we know that the total assets of the business are the same as the total liabilities and equity, and so the right hand column also shows each line as a percentage of total liabilities and equity.

Common Size Balance Sheet Analysis

Common size balance sheet analysis allows a business to perform a number of tasks as follows:

To show what proportion each item represents of the total assets of the business.

In the above example, accounts receivable is shown as being 27.7% of the total assets, compared to inventory at 0.9%. Clearly, the common size balance sheet identifies accounts receivable as the more important item to consider when the business monitors its working capital requirements.

To analyze changes in the balance sheet of the business over time.

By producing a common size balance sheet at the end of each accounting period, it is possible to monitor changes in each line item over time. For example, the following shows the vertical common size analysis for two accounting periods.

Common Size Balance Sheet Comparison Over Time
Period 1 % Period 2 %
Cash 14,259 6.9% 32,093 7.7%
Accounts receivable 57,263 27.7% 112,637 27.2%
Inventory 1,764 0.9% 4,563 1.1%
Current assets 73,286 35.4% 149,293 36.0%
Long term assets 133,714 64.6% 264,938 64.0%
Total assets 207,000 100.0% 414,231 100.0%
Accounts payable 22,367 10.8% 54,938 13.3%
Other liabilities 21,291 10.3% 46,383 11.2%
Current liabilities 43,658 21.1% 101,321 24.5%
Long-term debt 39,793 19.2% 82,089 19.8%
Total liabilities 83,451 40.3% 183,410 44.3%
Capital 19,764 9.5% 19,764 4.8%
Retained earnings 103,785 50.1% 211,057 51.0%
Total equity 123,549 59.7% 230,821 55.7%
Total liabilities and equity 207,000 100.0% 414,231 100.0%

Clearly, the business has expanded between the two accounting periods and the absolute values of each line item are significantly higher. However, a quick glance at the common size balance sheet in the right hand percentage columns, shows that for most items the percentages are similar.

For example, the accounts receivables has increased from 57,263 to 112,637 over the two periods. The common size balance sheets, however, shows that as a proportion of total assets accounts receivable has remained fairly constant at 27.7% and 27.2% of total assets. The conclusion is that, providing this level of accounts receivable is standard for the industry, the increase is as a result of the growth in the business and not due increased credit terms or to poor collection procedures.

By monitoring the trend of the common size balance sheet percentage for each line item, it is easy to spot changes which may need correcting.

To make comparisons of the business with other businesses irrespective of their relative size.

A similar process to that used above can be applied to compare two different businesses. In the example below. the common size balance sheets are for two different businesses of differing sizes.

Common Size Balance Sheet Comparison of Different Businesses
Business 1 % Business 2 %
Cash 14,259 6.9% 5,269 20.8%
Accounts receivable 57,263 27.7% 7,229 28.6%
Inventory 1,764 0.9% 4,992 19.7%
Current assets 73,286 35.4% 17,490 69.2%
Long term assets 133,714 64.6% 7,788 30.8%
Total assets 207,000 100.0% 25,278 100.0%
Accounts payable 22,367 10.8% 11,145 44.1%
Other liabilities 21,291 10.3% 3,751 14.8%
Current liabilities 43,658 21.1% 14,896 58.9%
Long-term debt 39,793 19.2% 2,625 10.4%
Total liabilities 83,451 40.3% 17,521 69.3%
Capital 19,764 9.5% 5,802 23.0%
Retained earnings 103,785 50.1% 1,955 7.7%
Total equity 123,549 59.7% 7,757 30.7%
Total liabilities and equity 207,000 100.0% 25,278 100.0%

While it is difficult to compare the absolute values of these two businesses, the common size balance sheet shows that relative to total assets, the first business has a much larger investment in long term assets (64.6% compared to 30.8%) and a much smaller investment in inventory (0.9% to 19.7%). On the liabilities and equity side, the first business is relying on retained profits (50.1% to 7.7%) to fund the business rather than additional liabilities (40.3% compared to 69.3%), and capital (9.5% compared to 23.0%) used by the second business.

This example is of two business in two very different industries and the common size balance sheet clearly highlights the differences irrespective of their relevant size.

The comparison could equally be done between the business and a competitor in the same industry or with industry averages, thereby highlighting any differences in operation which may need correcting. For example if the common size balance sheet shows that your accounts receivable is 27.7% of total assets and a competitors was say only 15% of total assets, it could indicate problems with your credit terms or your collection procedures.

Our common size balance sheet calculator is available and can be used to make the calculations and comparisons referred to above.

Common Size Balance Sheet November 6th, 2016Team

You May Also Like

Related pages

payroll quiz questions and answersdeferred revenue expenditure accounting treatmentdeferred revenue expendituregaap basicshow to calculate carrying value of a bondjournal ledger exampleshare buyback accounting entriesfob collectavailable for sale securities accounting journal entriesthe difference between markup and marginvariable overhead volume variancejournal entry for cash received in advancethe accumulated depreciation account is callederrors affecting the trial balancenet realizable value of inventorygrowing annuity future valuedays sales outstanding examplebad debt expense methodsjournalizing petty cashjob costing excel templatethree column cashbookmonthly balance sheet template excelcalculating bad debt expensesample of general ledgerreimburse petty cashdegree of operating leverage calculationsample cashflow statementhow to work out mark up percentagebookkeeping templates excelrevenue recognition percentage of completion methodaccrued revenue in balance sheetaccrual accounting journal entriesrecording accrued interestpetty cash spreadsheetexamples of journalizing transactionsannuity due tablejournal entry to record accounts payablecalculate annuity dueasset turnover ratio exampleaccrued expense examplebookkeeping spreadsheetshow to get manufacturing overheaddefinition of cashier's checkdoubtful accounts journal entrysunk cost in accountingaccounting templates for small businessdeferred tax liability meaningfob origin freight collectpayback calculation formulagross profit vs markupformula for straight line depreciationaverage payment period ratioformula to calculate cogsnet realisable value methodjournal entry for issuing shareslifo calculation formuladeclining depreciation formulapurchase of treasury stock journal entryfunctional format income statementstraight line depreciation schedule excelpurpose of subsidiary ledgercollected accounts receivablehow to calculate stock splitsales ledger formatexamples of intangible assets on the balance sheetadjusting entry for notes payablemarkup on cost formulasecurity coverage ratio formulahow to calculate the total variable costannuity loan formulacontribution margin per unit calculatoroperating leases accountingledgers bookkeepingprepaid insurance adjusting entryhow to journalize freight chargescoupon bonds calculatorfob shipping point who pays freightvariable overhead rate formula