Common Size Statements

Since the absolute figures vary from period to period and from enterprise to enterprise, comparison can be made after converting them to common size.

The Balance Sheet can be converted to common size by converting each item on the assets side as a percentage of total assets. Similarly each item on the liabilities side is converted as a percentage of liabilities and capital fund.

The Profit and Loss Account can also be converted to common size by converting each item of the Profit and Loss Account, including Profit, as a percentage of Sales. With this we will be able to ascertain the extent of influence of each item on the profit and the extent of profit on Sales.

In order to avoid the limitations of Comparative Statement, this type of analysis is designed. Under this method, financial statements are analysed to measure the relationship of various figures with some common base. Accordingly, while preparing the Common Size Profit and Loss Account, total sales are taken as common base and other items are expressed as a percentage of sales. Like this, in order to prepare the Common Size Balance Sheet, the total assets or total liabilities are taken as common base and all other items are expressed as a percentage of total assets and liabilities.

The Common Size Statements can be prepared for different periods or different firms, and compared. It is necessary that the accounting policies & practices are same in the periods / firms under comparison. The results are interpreted and used in taking decisions.