The Basics of Comparative Balance Sheet and Its Inclusions
A comparative balance sheet shows the status of an organization's assets, liabilities, and net worth at two different periods, for example, at the end of two fiscal years.
A comparison of financial performance over a certain period of time indicates that certain trends are taking shape. Investors can also compare different companies in the same business vertical to identify patterns and understand how the seasonality of that business affects the rest of the market.
What Are Its Inclusions?
A comparative balance sheet is the same as any other type of balance sheet. It contains the same line items. The only difference is that the items are listed on a comparative basis for two different periods. Below are just a few examples of its items.
1. Current Assets
Some of the usual elements in this are cash, accounts receivable, inventory, and prepaid expenses. The items change on a periodic basis, so these are often the ones that are replaced by more current versions. The numbers will be affected by the financial and business trends that the company is experiencing.
2. Long-Term Assets
The most common items in this category are property, plant, and equipment. A relative comparison of long-term assets over time is a useful way to see how effectively the company is managing its assets.
3. Current Liabilities
These are normally the same, but some items may have changed either because of an event in the company or because the company's business has changed. Current liabilities include accounts payable, taxes payable, accrued expenses, and short-term bank loans. A current liability is always paid within a year or less.
4. Long-Term Liabilities
Long-term liabilities include long-term bank loans, convertible bonds, convertible preferred stock, deferred taxes, pensions, and other long-term employee benefits. The issuance of long-term debt normally handles the longer-term obligations.
5. Equity
The stockholders' equity section will include the common stock, paid-in capital for the common stock, surplus earnings, retained earnings, and treasury stock. These are all owned by the stockholders of the company.
What Are the Benefits of a Comparative Balance Sheet?
The figures in comparative balance sheets can help you identify trends. This is commonly used alongside a comparative income statement that helps potential investors better understand how much your business has grown, shrunk, or stayed the same.
Income statements and balance sheets are important because they help you determine the financial health of your business. Investors look at these comparison reports seeing if a business is growing or shrinking and why this might be the case. This helps you make better-informed financial decisions for your business.
Income statements and balance sheets usually contain line items that let you see how much each figure has changed from one period to another. You can use this to see problem areas in your business, such as theft, fraud, or ineffective advertising.
Conclusion
The main functionality of a comparative balance sheet is to determine how much your company's assets and liabilities have changed from one period to another. That way, you can see if your company is growing or shrinking over time. You can also compare it to other companies in the same industry to see how well your company is faring against its competition.
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