Horizontal analysis is the technique of evaluating financial statements analysis to know the changes in the amounts of corresponding financial items over a period.
Whereas in the Vertical Analysis each amount from all 3 major categories of accounts viz; assets, liabilities and shareholder’s equities are represented as the proportion of the total balance of the respective account.
It is also known as trend analysis, a very useful tool for evaluating the trending situations of a company.
The sole purpose of this is to see the difference by comparing the information with bracketing periods. This data is further used for investigating the reasons behind the difference.
In Horizontal Analysis, two or more accounting years(periods) data of Balance sheet is used for comparison.
Usually, the earliest accounting period is used as the base period. All the items from later accounting period are compared with the respective items of the base period.
This is a two-step process. First of all, you will have to find the difference/variance of the similar items in the base and later period. The following formula is used to calculate the variance:
Variance = Amount of later period – Amount of base period
Secondly, you will have to find the difference percentage of variance of the items on Balance Sheet for the base and later period. Following formula is used to calculate the Variance percentage:
Variance Percentage = Variance Amount/Amount of Base year X 100.
We have created a Balance Sheet Horizontal Analysis Template with predefined formulas and categories of Assets, Liabilities and Shareholder’s Equity. It is free to use and you can also customize it as per your need.
You can use this for conducting the financial analysis of businesses. This template can be helpful to Accounting professionals, individual investors and auditors to evaluate the change in Balance sheet figures over a period of time.
You just need to input the respective amounts of the balance sheet in the light blue columns. The template will automatically do the horizontal analysis for you.
Let us discuss the contents of the Balance Sheet Horizontal Analysis Template in detail.
Contents of Balance Sheet Horizontal Analysis Template
This template consist of 3 major sections:
1. Header Section
2. Assets Section
3. Liabilities and Shareholder’s Equity Section
1. Header Section
The first row consists of Company Name followed by the heading of sheet ” Horizontal Analysis of Comparative Balance Sheets along with years of comparison.
2. Assets Section
Asset Section consists of the current assets and fixed assets of the company.
Current assets include cash and other cash equivalents like Accounts receivables, securities, inventory and prepaid expenses. Fixed assets include property, plant and equipment.
The Variance/difference of both the years of all the items of the asset category shows the increase or decrease in the asset as compared to the past year.
3. Liabilities and Shareholder’s Equity
a) Liabilities: Liabilities include accounts payable, staff salaries, accrued liabilities, short-term borrowings and unpaid taxes.
b) Shareholder’s Equity: Shareholder’s Equity includes preferred stock/owners equity, common stock/public Equity and retained earnings.
The subheading included here are as per the balance sheet data we have taken. It differs from cases to cases. You can add or remove subheadings are per your requirement.
Benefits of Horizontal Analysis
1. The Horizontal analysis performs the assessment of relative changes in different items of balance sheet over a period of time.
2. It shows the behavior of revenues, expenses, etc of the financial statements for comparative periods.
3. With Horizontal Analysis, the impact of operational activities is visible on the company’s financial condition during the period under review.
Thus, performing Horizontal Analysis helps in many ways, especially when we are planning to investment or buying a business.
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