Question

How do you standardize the balance sheet? In other words, how do you compute a common-size account in the Balance Sheet. Give an example.

Answer 1

Hi

Part 1 : The standard Balance sheet has 3 parts:

1. Assets,
2. Liabilities, and
3. Capital;

Asset = Liabilities + Capital.

Part 2: Computation of  a common-size account in the Balance Sheet.

There is no industry standard presentation for this , but generally, we can show a balance sheet with the actual numbers on the left, and the corresponding percentages on the right.

Let us understand how to comoute the common size % :

Step 1 : First start by setting total assets to 100 percent. i.e, divide the total assets by itself.

Step 2: Divide every other line item of balance sheet by total assets. For example, say a company has total assets of $2,000,000 and accounts receivable (A/R) of $330,000:

$330,000 A/R / $2,000,000 total assets = 16.5 % (i.e As on the date of balance sheet date, A/R represents 15 percent of total assets)

Example of Common size % :-

Assets	Amount	Perecentage	Calculation Explanation for %
Current Assets
Cash	70,000	3.50%	[70000/2000000]
Stock	50,000	2.50%	[50000/2000000]
Prepaid expenses	50,000	2.50%	[50000/2000000]
Accounts receivable	330,000	16.50%	[330000/2000000]
Total current assets	500,000	25.00%	[500000/2000000]
Non current Assets
Fixed Assets	1,000,000	50.00%	[1000000/2000000]
Goodwill	500,000	25.00%	[500000/2000000]
Total Non current Assets	1,500,000	75.00%	[1500000/2000000]
Total Assets	2,000,000	100.00%	[2000000/2000000]
Liabilities	Amount	Perecentage
Accounts payable	20,000	1.00%	[20000/2000000]
Salaries payable	800,000	40.00%	[800000/2000000]
Accrued expenses	30,000	1.50%	[30000/2000000]
Total current Liabilities	850,000	42.50%	[850000/2000000]
Debt- Longterm	150,000	7.50%	[150000/2000000]
Equity (i.e capital)	1,000,000	50.00%	[100000/2000000]
Total Liabilities	2,000,000	100.00%	[2000000/2000000]