A common-size balance sheet is an alternative form of the traditional balance sheet that uses percentages instead of dollar amounts. It helps business owners, investors and bankers compare companies of different sizes without revealing actual dollar amounts. In the short term, a company's executives can compare the firm's percentages to the industry's average percentages. They can also use the common-size balance sheet's information to review their long-term assets and liabilities, and address any significant changes.
Examine the assets section of the balance sheet. For the purposes of this example, use the following items: Cash, $10,000; Accounts Receivable, $9,000; Supplies, $1,000; Equipment, $80,000; Land, $100,000; and Building, $300,000.
Find the total assets. In this case, the total is $500,000. Most companies express each item on the balance sheet in terms of total assets.
Divide each dollar amount by the total assets and multiply by 100. In this case, the percentages are: Cash, 2 percent; Accounts Receivable, 1.8 percent; Supplies, 0.2 percent; Equipment, 16 percent; Land, 20 percent; Building, 60 percent. When you add the percentages--2 + 1.8 + 0.2 + 16 + 20 + 60--the total is 100.
Examine the balance sheet's liabilities and owners' equity sections. For the purposes of this example, use the following items: Accounts Payable, $15,000; Notes Payable, $60,000; Mortgage Payable, $50,000; and Owners' Equity, $375,000.
Divide each dollar amount by the total assets and multiply by 100. In this case, the percentages are: Accounts Payable, 3 percent; Notes Payable, 12 percent; Mortgage Payable, 10 percent; and Owners' Equity, 75 percent. When you add the percentages-- 3 + 12 + 10 + 75 --the total is 100.
Create a new balance sheet using these percentages instead of the dollar amounts. In the heading, substitute Common-Size Balance Sheet for Balance Sheet. Alternatively, you can add another column to the traditional balance sheet and include these percentages.