Horizontal balance sheet definition
/What is a Horizontal Balance Sheet?
A horizontal balance sheet uses extra columns to present more detail about the assets, liabilities, and equity of a business. The layout of this balance sheet format is as follows:
The first column itemizes all of the asset line items for which there are ending balances.
The second column contains the numbers associated with those assets.
The third column lists all of the liability line items and then the equity line items for which there are ending balances.
The fourth column states the numbers associated with these liabilities and equity items.
The total for all the assets in the second column should match the total for all the liabilities and equity items in the fourth column. A sample horizontal balance sheet appears in the following exhibit.
When to Use a Horizontal Balance Sheet
Here are some circumstances in which using a horizontal balance sheet makes sense:
Comparative analysis. When stakeholders need to compare assets directly against liabilities and equity, a horizontal format makes it easier to assess the company’s financial stability and liquidity. For example, banks and creditors may prefer this format to quickly evaluate if a company has enough assets to cover its liabilities.
Presentation to external stakeholders. A horizontal balance sheet is often seen as more visually intuitive for investors, board members, or lenders who might not be familiar with financial statements. The side-by-side layout simplifies understanding the relationship between what a company owns and owes.
Emphasis on financial structure. Businesses that want to highlight their capital structure—the balance between debt and equity—might use a horizontal format. This layout allows users to quickly assess leverage and the proportion of equity financing relative to debt.
Small or medium-sized businesses. For companies with less complex financials, a horizontal balance sheet can present a clear and straightforward view of financial health without overwhelming detail. This simplicity can help small business owners make informed decisions quickly.
Reporting requirements or preferences. In some cases, stakeholders or regulatory bodies might require or prefer a horizontal balance sheet for consistency in reporting or due to industry norms.
Overall, a horizontal balance sheet is effective when the goal is to enhance clarity and facilitate quick comparisons between assets and liabilities plus equity.
Horizontal Balance Sheet vs. Vertical Balance Sheet
The horizontal balance sheet works best when there are a number of line items to be presented, since the presentation format allows for additional line items. If there are fewer line items to be presented, it is more common to present the balance sheet in the vertical format, where the asset, liability, and equity line items are all clustered into a single column. In order to switch from the horizontal mode of presentation to the vertical mode, it may be necessary to consolidate some of the line items in the horizontal mode of presentation.
It is difficult to expand the horizontal format to present the financial position of a business for more than one period, since additional periods will take up so much space that the presentation becomes difficult to read, given the small font sizes that must be used. Consequently, in cases where the financial position of multiple periods must be presented, it is customary to adopt the vertical balance sheet format, where there is more space for additional columns.
Both the horizontal and vertical formats are acceptable forms of presentation.