Balance sheet is one of the principal year-end financial statements prepared by companies. A consolidated balance sheet is similar to a balance sheet, but there is a difference between them in terms of preparation. The key difference between balance sheet and consolidated balance sheet is that balance sheet is prepared by all companies whereas consolidated balance sheet is only prepared by companies holding shares in another entity in order to reflect their share of ownership.
CONTENTS
- Overview and Key Difference
- What is a Balance Sheet
- What is a Consolidated Balance Sheet
- Side by Side Comparison – Balance Sheet vs Consolidated Balance Sheet
What is a Balance Sheet?
Balance Sheet, also known as the Statement of Financial Position, is one of the key year-end financial statements prepared by companies to show assets, liabilities, and capital of the business as at a particular point in time and is used by various stakeholders to arrive at decisions regarding the company. The balance sheet of listed companies should be prepared according to accounting principles and a specific format.
Uses of Balance Sheet
- Serves as a useful document in obtaining a quick outlook of the company’s financial position at a single point in time
- For the purpose of ratio analysis
Ratio analysis is an important part of management decision making, and a number of ratios are calculated using the balance sheet such as,
- Current ratio (Current assets /Current liabilities)
- Quick/acid test ratio (Current assets – Inventory/ Current liabilities)
- Gearing ratio (Debt/Equity)
Investors and potential investors refer to the balance sheet when making investing decisions. It should also be presented when obtaining credit from banks and other financial institutions.
The format of the balance sheet is prepared in accordance with the main accounting formula, which is
Non-current assets + Current assets = Equity + Non- current liabilities + Current liabilities
Non-current assets
Long-term investments whose full value will not be realised within the accounting year
Current assets
Assets whose full value can reasonably expect to be converted into cash within the accounting year
Equity
Securities that represents the owners’ interest in the company
Non-current liabilities
Long-term financial obligations that do not mature within the accounting period
Current liabilities
Short-term financial obligations whose settlement is due within the accounting period
Format of a Balance Sheet
| Balance sheet of AAA Ltd as at 31.12.2016 | $ | $ |
| Assets | ||
| Current Assets | ||
| Cash and Cash Equivalents | XXX | |
| Accounts recievables | XX | |
| Inventory | XXX | |
| Prepaid expenses | XX | |
| Short-term Investments | XXX | |
| Total Current Assets | XXXX | |
| Long Term Assets | ||
| Property, plant and equipment | XXX | |
| (Less accumulated depreciation) | (XX) | |
| Long term investments | XXX | |
| Total Long-term assets | XXXX | |
| Total Assets | XXXXXX | |
| Liabilities and Equity | ||
| Liabilities | ||
| Current liabilities | XXX | |
| Accounts payable | XXXX | |
| Short-term loans | XXX | |
| Tax payable | XX | |
| Unearned revenue | XX | |
| Total Current Liabilities | XXXX | |
| Long term Liabilities | ||
| Long-term debt | XXX | |
| Deferred income tax | XX | |
| Other liabilities | XX | |
| Total long-term liabilities | XXXX | |
| Total liabilities | XXXX | |
| Equity | ||
| Share capital | XXXX | |
| Share premium | XXX | |
| Retained earnings | XXX | |
| Total Equity | XXXXX | |
| Total liabilities and equity | XXXXXX |
What is a Consolidated Balance Sheet?
The underlying principles of the preparation of a consolidated balance sheet are the same as the balance sheet; however, there are changes between the two. Consolidated Balance Sheet should be prepared by a parent company holding other entities such as,
Subsidiaries
The parent company owns a stake of more than 50% of the subsidiary, thus exerts control.
Associates
The parent company’s stake is between 20%-50% of the associate where the parent company exerts significant influence.
Preparation of Consolidated Balance Sheet
- Assets and liabilities in the subsidiary or associate should be recorded in addition to the parent company
e.g.: If ABC Ltd owns 55% of XYZ Ltd, 55% of assets and liabilities of XYZ Ltd will be shown in the Balance Sheet of ABC Ltd. XYZ has property, plant and equipment value of $25,000.
| ABC | XYZ | Total | |
| Assets | $ | $ | $ |
| Long-term assets | |||
| Property, plant and equipment | 50,500 | 13, 750 (25000*55%) | 64,250 |
The share capital of the subsidiary or associate will not be reflected in the consolidated balance sheet in the records of the parent company. Share capital automatically adjusts with the amount of the investment of parent company into subsidiary company.
Minority Interest
Also referred to as non-controlling interest, this arises when holding a subsidiary. This is the share of ownership in a subsidiary’s equity that is not owned or controlled by the parent company. This will be calculated using the net income of the subsidiary that belongs to the minority shareholders.
Eg; if the parent company holds 60% of the subsidiary, the minority interest is 40%. Supposing the subsidiary made a net income of $ 42,000 for the year, the minority interest will be $ 16,800 (42000* 40%)
What is the difference between Balance Sheet and Consolidated Balance Sheet?
Balance Sheet vs Consolidated Balance Sheet |
|
| Balance sheets are prepared by all companies. | Consolidated balance sheets are only prepared by companies holding shares in another entity. |
| Ease of Preparation | |
| Preparing a balance sheet is less complicated and less time-consuming. | Preparing a consolidated balance sheet is more complicated and time-consuming. |
Reference List:
Image Courtesy:
“Restricted cash” By Zceisab – Own work (CC BY-SA 4.0) via Commons Wikimedia
“47344” (Public Domain) via PEXEL