Balance Sheet and Consolidated Balance Sheet - Is it the Same?
Students pursuing Accountancy in the field of Commerce must have come across the process of preparing of Balance Sheet, also they are introduced to Consolidated Balance Sheet. Preparing a balance sheet is pretty simple, all you need is to figure the company’s assets, liabilities, and the shareholder’s equity. While in the case of the consolidated balance sheet, you need to include other items, for example - minority interest.
In this section, we will know about the balance sheet and consolidated balance sheet. We will further discuss the Standalone vs. Consolidated Balance Sheet and Consolidated Balance Sheet vs. Balance Sheet.
Balance Sheet Vs. Consolidated Balance Sheet
To briefly differentiate, we can say there is a fine difference drawn between the balance sheet and the consolidated balance sheet. The difference lies in the way how both are prepared. The balance sheet is being prepared by all companies as it is one of the major financial statements. While the consolidated balance sheet is not being prepared by all the companies, only the companies who have shares in other companies (known as subsidiaries) need to prepare this consolidated balance sheet.
To get a grip on the difference between balance sheet and consolidated balance sheet, students are required to study the difference chart in our prevailing section. Before that, let us know what is a Balance Sheet and what is a consolidated Balance Sheet.
What is a Balance Sheet?
A Balance sheet is a precise snapshot of the representation of the assets, equity, and liabilities of an entity. The Balance Sheet is the outline mark of every enterprise which represents the financial position of the business.
As known, there are three main components of a Balance Sheet, namely the assets (which includes the inventory, accounts receivable), equity (including the share capital, capital surplus), and liability (they are - accounts payable, customer deposits).
What is a Consolidated Balance Sheet?
When the assets, liabilities & equity of a firm are merged with its subsidiaries, a single report is prepared, this report is termed as ‘Consolidated Balance Sheet’. In other words, it is a consolidating of two balance sheets - one of the company’s another of its subsidiaries.
Difference between Balance Sheet Vs. Consolidated Balance Sheet
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An illustration depicting balance sheet vs consolidated balance sheet
Standalone Vs Consolidated Balance Sheet
Here, we will learn about the standalone balance sheet and will also know how different it is from a normal balance sheet under the consolidated vs. the standalone balance sheet.
Standalone Balance Sheet
Standalone balance sheets are the financial statements of a single company. These statements represent the position of the assets and liabilities of the holding company which functions alone, this is done without considering the impact of the assets and liabilities of the subsidiary companies.
The standalone financial statements reflect the financial performance of the holding company which goes irrespective of the financial performance of their subsidiaries.
Consolidated Balance Sheet
Consolidated balance sheets are known as the financial statements which are drawn up when the individual financial statements are stated of all the subsidiary companies. They are combined with the standalone financial statements of the holding company.
Consolidated financial statements reflect the financial performance and position of assets and liabilities of the entire group of the company as a whole (along with their subsidiaries).
The Difference between a Standalone Balance Sheet and a Consolidated Balance Sheet are as below:
Consolidated Statement of Financial Position vs Balance Sheet
While preparing the standalone financial statements is quite a simpler process of reporting the assets and liabilities of a company from their base books of accounts, preparing the consolidated financial statements is even more complex. Preparing the consolidated financial statements requires the knowledge of advanced accountancy and also the knowledge of the consolidation rules. A consolidated statement of financial position is especially relevant to the group companies that have several other subsidiaries under them.
FAQs on Balance Sheet Vs Consolidated Balance Sheet
1. What is the main difference between a standalone and a consolidated balance sheet?
A standalone balance sheet shows the financial position (assets, liabilities, and equity) of a single, individual company. In contrast, a consolidated balance sheet presents a combined financial picture of a parent company and all its subsidiary companies, treating them as one single economic entity.
2. What is the purpose of preparing a consolidated balance sheet?
The main purpose is to give shareholders, creditors, and other stakeholders a holistic view of the entire group's financial health. It prevents a parent company from hiding poor performance in its subsidiaries and shows the total assets and liabilities that the parent company controls as a whole.
3. When is a company required to prepare a consolidated balance sheet?
A company is required to prepare a consolidated balance sheet when it holds a controlling interest in one or more other companies, known as subsidiaries. As per standard accounting principles, controlling interest usually means owning more than 50% of the subsidiary's voting shares.
4. What are the key advantages of using a consolidated balance sheet for analysis?
The key advantages for financial analysis include:
- Complete Picture: It provides a comprehensive view of the financial health of the entire group of companies.
- Better Assessment: It allows for a more accurate evaluation of the group's financial strength and performance.
- Transparency: It helps prevent companies from hiding liabilities or significant losses in their subsidiary accounts.
- Informed Decisions: It helps investors and lenders make better-informed decisions about the parent company's overall value and risk.
5. How are transactions between a parent and subsidiary treated in a consolidated balance sheet?
In a consolidated balance sheet, all inter-company transactions are eliminated or cancelled out. For example, if a parent company loaned money to its subsidiary, this loan is an asset for the parent and a liability for the subsidiary. When consolidating, this internal loan is removed to avoid overstating the group's total assets and liabilities. The goal is to only show transactions with external parties.
6. Which is a better indicator of a company's financial health: a consolidated or a standalone balance sheet?
For a parent company, the consolidated balance sheet is generally a better indicator of its overall financial health because it shows the performance of all entities under its control. However, a standalone balance sheet remains important for understanding the parent company's individual performance, its ability to pay dividends, and its own debt levels without the direct influence of its subsidiaries. For a complete analysis, both are useful.
7. Could a company have a strong standalone balance sheet but a weak consolidated one? Why?
Yes, this is possible. A parent company might be profitable on its own, showing a strong standalone balance sheet. However, if its subsidiaries are heavily in debt or making significant losses, the consolidated balance sheet would reveal this underlying weakness. The combined figures might show high overall group debt or low profitability, painting a much weaker picture of the entire organisation.
