Common Size Statement

Common Size Statement

A common size statement — also called a component percentage statement — is a financial tool that helps you study key changes and trends in a company's financial position and operating results. The core idea is simple: every item in the statement is expressed as a percentage of a common base figure.

For a common size balance sheet, each asset is shown as a percentage of total assets, and each liability as a percentage of total liabilities. For a common size statement of profit and loss, each item is shown as a percentage of revenue from operations.

When you prepare such statements for successive periods, the percentages reveal how the relative importance of each item has changed over time. This is where the real power lies — common size analysis lets you compare companies of vastly different sizes because it strips away the absolute rupee amounts and focuses on the structure of the financial statements. Inter-firm comparison, or comparing a company's position with the industry as a whole, becomes possible. Because each item is analysed against a base within the same period, this is a form of vertical analysis.

Procedure for Preparing Common Size Statements

1. List the absolute figures (in rupees) for two points of time — say Year 1 and Year 2.
2. Choose a common base and set it as 100. For the statement of profit and loss, revenue from operations is the base. For the balance sheet, total assets (or total liabilities) is the base.
3. For every item in both years, calculate its percentage of that base.

The resulting table has columns for: Particulars, Absolute Amounts for Year 1 and Year 2, and Percentages for Year 1 and Year 2.

Common Size Income Statement — Key Points

In the common size income statement, revenue from operations is always taken as 100%. Every other item — cost of goods sold, operating expenses, non-operating expenses, depreciation, wages, other income, employee benefit expenses, taxes — is expressed as a percentage of revenue from operations.

Common Size Balance Sheet — Key Points

In the common size balance sheet, total assets (or total liabilities) is taken as 100%. Every item on the assets side is shown as a percentage of total assets, and every item on the equity and liabilities side as a percentage of total liabilities (which equals total assets). Each year uses its own total as the base.

Why Common Size Analysis Matters

• It reveals the structure of financial statements — what proportion of assets is tied up in fixed assets versus current assets, or how much of the company's revenue is consumed by employee costs.
• It enables comparison across time for the same company — you can see whether the cost structure is improving or deteriorating.
• It enables comparison across companies of different sizes — a small company and a large company can be compared on the basis of percentages, not rupees. …