Accounting

We answer your accounting questions.

Over 500 questions have been answered on our accounting blog.

 accounting blog

September 7, 2007

What is the difference between vertical analysis and horizontal analysis?

Vertical analysis reports each amount on a financial statement as a percentage of another item. For example, the vertical analysis of the balance sheet means every amount on the balance sheet is restated to be a percentage of total assets. If inventory is $100,000 and total assets are $400,000 then inventory is presented as 25 ($100,000 divided by $400,000). If cash is $8,000 then it will be presented as 2 ($8,000 divided by $400,000). The total of the assets will now add up to 100. If the accounts payable are $88,000 they will be presented as 22 ($88,000 divided by $400,000). If owner’s equity is $240,000 it will be presented as 60 ($240,000 divided by $400,000). The restated amounts from the vertical analysis of the balance sheet will be presented as a common-size balance sheet. A common-size balance sheet allows you to compare your company’s balance sheet to another company’s balance sheet or to the average for its industry.

Vertical analysis of an income statement results in every income statment amount being presented as a percentage of sales. If sales were $1,000,000 they would be restated to be 100 ($1,000,000 divided by $1,000,000). If the cost of goods sold is $780,000 it will be presented as 78 ($780,000 divided by sales of $1,000,000). If interest expense is $50,000 it will be presented as 5 ($50,000 divided by $1,000,000). The restated amounts are known as a common-size income statement. A common-size income statement allows you to compare your company’s income statement to another company’s or to the industry average.

Horizontal analysis looks at amounts on the financial statements over the past years. For example, the amount of cash reported on the balance sheet at December 31 of 2006, 2005, 2004, 2003, and 2002 will be expressed as a percentage of the December 31, 2002 amount. Instead of dollar amounts you might see 134, 125, 110, 103, and 100. This shows that the amount of cash at the end of 2006 is 134% of the amount it was at the end of 2002. The same analysis will be done for each item on the balance sheet and for each item on the income statement. This allows you to see how each item has changed in relationship to the changes in other items. Horizontal analysis is also referred to as trend analysis.

Vertical analysis, horizontal analysis and financial ratios are part of financial statement analysis.

Learn more about Financial Ratios.

Related Questions
the accounting coach

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



 Accounting Exams

Accounting Exams
Printable (PDF) Exams on 16 financial accounting topics and 19 managerial accounting topics. More Info...

     Accounting Bookkeeping Test

Bookkeeping Test
Test your bookkeeping skills. Printable (PDF) Bookkeeping Test with 175 total questions. More Info...

 Accounting Forms

Business Forms
Our Master Set of 80 Business Forms will assist you in preparing financial statements, financial ratios, break-even calculations, depreciation, standard cost variances, and more. More Info...


Comments

23 Responses to “What is the difference between vertical analysis and horizontal analysis?”

  1. Bikesh on February 27th, 2008 6:12 pm

    Good Site!

  2. Grese on March 22nd, 2008 10:22 pm

    Helps a lot. Great response!

  3. Cocoa on June 26th, 2008 2:52 pm

    I missed how accounts payable came out to be 88,000 presented at 22 and for the rest, etc. Also, why is the interest calculated as 5 for (50,000). This is a good web-site i ask the question because i’m still learning.

    Thanks

  4. Cocoa on June 26th, 2008 2:53 pm

    Never mind i got is, thanks

  5. Peaches on October 17th, 2008 9:00 am

    Very Helpful information. Thanks accountingcoach.com

  6. ngobi on December 26th, 2008 1:39 am

    I wanted to get an illustration of a Vertical balance sheet but oops. I failed to find one. Can any one come to my resque ?

  7. ipatty on January 30th, 2009 12:43 am

    This was really helpful with my homework.
    Thank you for caring.

  8. kl on February 15th, 2009 3:45 pm

    i still dont know how to calculate horizontal common size analysis

  9. Bambi on August 22nd, 2009 7:10 pm

    How does 1,000,000/1,000,000=100?

  10. ACoach on August 23rd, 2009 4:51 am

    The amounts on the vertical and horizontal analysis are percentages. Therefore, on the vertical income statement Sales will be 100 (meaning 100%). On the vertical balance sheet the total assets will appear as 100 (meaning 100%).

  11. siddiqui on September 30th, 2009 3:15 am

    good site,informative too.

  12. PROF.AHMED ALI on October 12th, 2009 6:21 am

    DEAR SIR,
    THANK YOU FOR YOUR HELPING ACCOUNTANT STUDENTS AND TEACHERS.
    WE HOPE YOU WILL CONTINUE YOUR KNOWDGLE ASSISTANT

  13. Rebecca on November 29th, 2009 6:59 pm

    How do you calculate the percentage for the vertical analysis on an income statement? I am so confused

  14. Peri on December 2nd, 2009 8:42 pm

    Thx for sharing your experience.

  15. waqar anwar on December 3rd, 2009 10:38 am

    thanks
    you people are doing a great job
    you are really helpful
    thanks to all the team

  16. Sobia on December 4th, 2009 6:58 am

    Greattttttt!!!!!!!
    you people are helping those who really want to learn.
    continue it as this site has saved me from insult in the class
    thanx

  17. simone on December 12th, 2009 10:00 am

    I understand some things that were strange to me

  18. Matt on December 13th, 2009 12:21 am

    Thanks for this great and simple explanation of vertical accounting!

  19. Julie on January 15th, 2010 1:17 am

    Thank you for all the help you have a great mind. I’m taking an accountin class and I dont know how I’m going to pass. Thank you for a such as simple explanation.

  20. Sam on January 22nd, 2010 7:41 pm

    Question regarding hortizontal analysis.

    1. How do we calculate percentage if the base value has nothing.
    2. How do we calculate percentage when the base value is 0

  21. maran on February 7th, 2010 11:16 am

    If my total assets were 1,139,500 in 2010 and 1,230,500 in 2009 - a decrease of 91,000 - how do I express that as a percentage?

  22. ACoach on February 8th, 2010 5:24 am

    You divide the change (the decrease of 91,000) by the base year (the year you are coming from…in this case 2009). In your example the percentage change is 91,000 divided by 1,230,500 = 7.39537% or 7.4%

  23. kev's on March 7th, 2010 6:12 am

    this is website is useful..

Leave a Reply