Comparative Balance Sheet

A comparative analysis is one of the widely used tools to analyze financial statements. It is an act of comparing the report for 2 or more financial years or any given period. A comparative balance sheet is one of the most sought financial statements by the business. The biggest advantage of comparing financial statements over time is discovering trends, analyzing the findings and taking suitable decisions.

To define comparative financial statements, it’s a financial statement which represents the financial position over different periods of time. The financial position is represented in a comparative form to give an idea of financial position at two or more periods.

Generally, two financial statements are prepared in comparative form for financial analysis

Included in a Comparative Balance Sheet

The line items that are included in a comparative balance sheet are the same that are included in an individual balance sheet. The general categories included are: assets, liabilities, and equity. The categories are further broken down into current assets, current liabilities, long-term assets, and long-term liabilities.

More specifically, common balance sheet items are as follows:

Current assets:

• Cash
• Accounts receivable
• Inventory
• Prepaid expenses

Long-term assets:

• Fixed assets
• Long-term investments

Current liabilities:

• Accounts payable
• Accrued expenses (such as payroll and payroll taxes)
• Notes payable

Long-term liabilities:

• Long-term bank loans
• Other long-term debt

Equity:

• Common stock
• Retained earnings

Format:

Advantages of Comparative Balance Sheet

• Trend Indicator: It shows the company’s trend by putting several years’ financial figures in one place like an Increase or Decrease in profit, current assets, current liabilities, loans, reserves & surplus, or any other items that help investors make the decision.
• Comparison: It is effortless to compare the figures for the current year with the previous years as it gives both the years’ figures in one place. It also assists in analyzing the data of two or more companies or subsidiaries of one company.
• Compare performance with the Industry Performance: Helps to compare one company’s performance with another company or the industry’s average performance.
• Ratio Analysis: Financial ratio is derived from the balance sheet items. The comparative balance sheet’s financial ratio of two years of two companies can be derived to analyze the company’s financial status. For example, the current ratio is derived with the help of current assets and current liabilities. If the current ratio of the current year is more than the last year, it shows the company’s liabilities have been reduced from last year against the existing assets.
• Helps in Forecasting: It also helps in forecasting because it provides the past trend of the company based on which the management can forecast the company’s financial position.

Limitation/Disadvantages

• Inflationary Effect is not Considered: While preparing the comparative balance sheet, the inflation effect is not considered. Therefore, only a comparison with other balance sheets will not give the correct picture of the company’s trend.
• Uniformity in Policy and Principles: Comparative balance sheets will not give the correct comparison if two companies have adopted different policies and accounting principles while preparing the balance sheet or if the same company has adopted other accounting methods in two additional years.
• Market Situation and Political Conditions not Considered: While preparing the comparative balance sheet, marketing conditions, political environment, or any factor affecting the company’s business are not considered. Therefore, it does not give the correct picture every time. For example, suppose the overall economy is going down in the current year, or the political condition is unstable compared to last year. In that case, it will decrease the demand, and general company sales will experience de-growth, not because of its performance but external factors.
• Misleading Information: Sometimes, it gives misleading information, thus, misguiding the person who reads the comparative balance sheet. For example, if a product was unavailable for last year and is available for the current year, it will show a 100% change over the previous year. It implies that one needs to read the complete financial statement, not just a comparative balance sheet.