Lesson
Learn how to compare two years of financial statements and understand whether a business is improving or declining.
Understand previous year, current year, increase, decrease, absolute change, percentage change, and simple interpretation of comparative statements.
Concept explanation
Comparative statements compare financial statement figures of two or more years.
Normal financial statements show one year's numbers.
Comparative statements show how numbers changed from one year to another.
Example: sales last year were Rs.5,00,000 and sales this year are Rs.6,00,000.
Increase is Rs.1,00,000.
Now we know sales improved.
Simple line: Comparative statements help us see whether the business is improving or declining.
One year's numbers can be useful, but they do not show direction.
If profit is Rs.1,00,000, we should ask whether it was higher or lower than last year.
If loan is Rs.4,00,000, we should ask whether debt increased too much.
Comparative statements help us notice growth, weakness, warning signs, and improvement.
They make analysis easier because changes are shown clearly.
Simple line: Comparison tells us the direction of the business.
Riya Stationery Ltd. wants to know whether the business improved this year.
Last year sales were Rs.5,00,000.
This year sales are Rs.6,00,000.
At first, Riya feels happy because sales increased.
But then she checks profit.
Last year profit was Rs.1,20,000.
This year profit is Rs.90,000.
Now she understands that sales increased, but profit decreased.
This means expenses may have increased too much.
Simple line: Comparative statements help us ask better questions.
Previous year means the earlier year.
Current year means the year we are studying now.
In a comparative statement, both years are shown side by side.
Example: Previous year sales Rs.5,00,000 and current year sales Rs.6,00,000.
Then we calculate the change.
If current year is higher, there is an increase.
If current year is lower, there is a decrease.
Simple line: Previous year is the base. Current year is compared with it.
Rule: Absolute change = Current year amount - Previous year amount
Absolute change means the change in rupees.
It shows by how much an item increased or decreased.
Example: sales increased from Rs.5,00,000 to Rs.6,00,000.
Absolute change = Rs.6,00,000 - Rs.5,00,000 = Rs.1,00,000.
So sales increased by Rs.1,00,000.
If profit falls from Rs.1,20,000 to Rs.90,000, change is Rs.30,000 decrease.
Simple line: Absolute change tells the rupee difference.
Rule: Percentage change = Absolute change / Previous year amount x 100
Percentage change shows the change as a percentage of the previous year amount.
Example: sales increased from Rs.5,00,000 to Rs.6,00,000.
Absolute change is Rs.1,00,000.
Percentage change = Rs.1,00,000 / Rs.5,00,000 x 100 = 20%.
So sales increased by 20%.
Percentage change helps compare items of different sizes.
Simple line: Percentage change tells how big the change is compared with last year.
A Comparative Statement of Profit and Loss compares income and expenses of two years.
It usually compares sales, other income, expenses, and profit.
It helps us see whether sales increased, expenses increased, and profit improved or declined.
Example: sales increased by Rs.1,00,000, but expenses increased by Rs.1,30,000.
Profit may decrease even though sales increased.
Simple line: This statement explains changes in income, expenses, and profit.
A Comparative Balance Sheet compares assets, liabilities, and equity of two years.
It helps us see changes in cash, receivables, inventory, fixed assets, loans, creditors, and shareholders' funds.
Example: assets increased by Rs.2,00,000, but loan increased by Rs.1,80,000.
The business has more assets, but much of the growth may be funded by debt.
Simple line: Comparative Balance Sheet shows changes in financial position.
Do not stop after calculating increase or decrease.
Ask what the change means.
Sales increase may be good.
Expense increase may be normal if sales also increased, but it can be a warning if expenses grew faster than sales.
Profit increase is usually good.
Cash decrease can be a warning if the business needs money to pay bills.
Loan increase may help growth, but too much loan can create risk.
Simple line: Calculation gives the number. Interpretation gives the meaning.
Sometimes sales increase, but profit decreases.
This can happen when cost of goods, salary, rent, advertising, interest, or other expenses increase faster than sales.
Example: Accy Mobile Accessories Ltd. increased sales from Rs.5,00,000 to Rs.6,00,000.
But expenses increased from Rs.3,80,000 to Rs.5,10,000.
Profit fell from Rs.1,20,000 to Rs.90,000.
This tells us that higher sales did not convert into higher profit.
Simple line: Sales growth is good only when profit also remains healthy.
Sometimes assets increase, but debt also increases.
This means the business may have bought assets using borrowed money.
Example: machinery increased by Rs.2,00,000 and loan increased by Rs.1,80,000.
The business may be expanding.
But we should check whether the company can repay the loan.
Asset growth is not always risk-free.
Simple line: More assets are good only if debt is controlled.
A simple comparative format has item name, previous year amount, current year amount, absolute change, and percentage change.
Example columns: Particulars, Previous Year, Current Year, Increase or Decrease, Percentage Change.
For sales: Rs.5,00,000, Rs.6,00,000, increase Rs.1,00,000, increase 20%.
For profit: Rs.1,20,000, Rs.90,000, decrease Rs.30,000, decrease 25%.
For cash: Rs.80,000, Rs.50,000, decrease Rs.30,000, decrease 37.5%.
Simple line: The format shows numbers and changes together.
Easy memory table
| Principle / Concept | Simple Meaning | Easy Example |
|---|---|---|
| Previous year | The earlier year used for comparison | Last year sales Rs.5,00,000 |
| Current year | The year being studied now | This year sales Rs.6,00,000 |
| Absolute change | Rupee increase or decrease | Increase Rs.1,00,000 |
| Percentage change | Change compared with previous year | Increase 20% |
| Interpretation | Simple meaning of the change | Sales improved, but check profit too |
| Trend | Direction of movement | Improving, declining, or stable |
Simple comparison
| Normal Financial Statements | Comparative Statements |
|---|---|
| Shows one year's figures | Shows two or more years together |
| Tells what the amount is | Tells how the amount changed |
| Example: Sales Rs.6,00,000 | Sales increased from Rs.5,00,000 to Rs.6,00,000 |
| Useful for reporting | Useful for analysis |
| Does not directly show trend | Shows increase, decrease, and trend |
Memory line: normal statements show numbers; comparative statements show change.
Simple comparison
| Comparative Statement of Profit and Loss | Comparative Balance Sheet |
|---|---|
| Compares income and expenses | Compares assets, liabilities, and equity |
| Helps study sales, expenses, and profit | Helps study cash, assets, debt, and capital |
| Shows operating performance | Shows financial position |
| Example question: Did profit improve? | Example question: Did debt increase too much? |
Use both statements together for a better picture.
Comparative statement guide
| Change | Simple meaning | What to check next |
|---|---|---|
| Sales increased | Business activity may be growing | Check whether profit also increased |
| Expenses increased | Costs are higher | Check whether expenses grew faster than sales |
| Profit decreased | Business result weakened | Check sales, cost, expenses, and interest |
| Cash decreased | Less immediate money is available | Check collections, payments, and bank balance |
| Assets increased | Business may be expanding | Check whether assets were funded by loan |
| Loan increased | Debt and risk may be higher | Check repayment ability and interest burden |
A change is only the starting point. Always ask what caused it.
Visual flow
Take previous year figures
Take current year figures
Find absolute change
Find percentage change
Mark increase or decrease
Ask what the change means
Connect sales, expenses, profit, assets, and debt
Decide whether the business looks stronger or weaker
Solved examples
Example 1
Previous year sales Rs.5,00,000 Current year sales Rs.6,00,000 Absolute increase = Rs.1,00,000 Percentage increase = Rs.1,00,000 / Rs.5,00,000 x 100 = 20%
Sales increased, so business activity improved.
Next, we should check whether profit also increased.
Example 2
Previous year profit Rs.1,20,000 Current year profit Rs.90,000 Absolute decrease = Rs.30,000 Percentage decrease = Rs.30,000 / Rs.1,20,000 x 100 = 25%
Profit decreased by 25%.
The business should check expenses, cost of goods, interest, and selling price.
Example 3
Sales went up Expenses went up even more Profit may decrease Interpretation: growth is not strong if costs are uncontrolled
Higher sales do not automatically mean higher profit.
Expenses must be compared with sales.
Example 4
Absolute decrease = Rs.30,000 Cash is lower than last year Interpretation: liquidity may need attention
Cash helps pay immediate dues.
A fall in cash should be checked with debtors, creditors, and bank payments.
Example 5
Assets increased Loan also increased heavily Interpretation: expansion may be funded by borrowing
Asset growth can be good.
But high debt may increase risk and interest burden.
Example 6
Absolute increase = Rs.60,000 Receivables doubled Interpretation: more credit sales or slower collection may exist
Higher receivables are not automatically good or bad.
We should check whether customers are paying on time.
Avoid these
Practice prompts
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After comparing two years of figures, the next step is to convert figures into percentages so comparison becomes easier.
Continue to Common Size Statements