What is a 'Common Size Balance Sheet'
A common size balance sheet is a balance sheet that displays both the numeric value and relative percentage for total assets, total liabilities and equity accounts. Common size balance sheets are used by internal and external analysts and are not a reporting requirement of GAAP. A common size balance sheet allows for the relative level of each [asset, liability and equity account to be quickly analyzed.
BREAKING DOWN 'Common Size Balance Sheet'Any single asset line item is compared to the value of total assets. Likewise, any single liability is compared the value of total liabilities and any equity account is compared to the value of total equity. For this reason, each major classification of account will equal 100% as all smaller components will add up to the major account classification.
Example of 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 also has $1 million in cash. The common size balance sheet reports the total assets first in order of liquidity. For this reason, the top line of the financial statement would list the cash account and financial value of $1 million. In addition, the cash represents $1 million of the total $8 million in total assets. Therefore, along with reporting the dollar amount of cash, the common size financial statement reports that cash represents 12.5% ($1 million divided by $8 million) of total assets.
Common size balance sheets are not required under generally accepted accounting principles. The percentage information presented in these financial statements are not required by any regulatory agency. Although the information presented is useful to financial institutions and other lenders, a common size balance sheet is typically not required during the application of a loan. Although common size balance sheets are typically utilized by internal management, they provide useful information to external parties including independent auditors.
Usefulness of Common Size Balance Sheet
The value of a common size balance sheet resides in the ease of comparability. The purpose of a common size balance sheet is to allow quick comparisons for different applications. First, a common size balance sheet permits the ability to quickly compare the historical trend of a specific chart of accounts. Second, the percentages may be applied across companies and across industries. Although companies may vary in size, common size balance sheets eliminate any issues when comparing businesses of varying sizes as the use of percentages establishes a comparable baseline. Finally, the percentages – similar to the dollar amounts – may be analyzed over time. Common size balance sheets offer simplicity in comparing relative financial data over specific periods.