Statement of changes in equity
/What is the Statement of Changes in Equity?
The statement of changes in equity is a reconciliation of the beginning and ending balances in a company’s equity during a reporting period. It is not considered an essential part of the monthly financial statements, and so is the most likely of all the financial statements not to be issued. However, it is a common part of the annual financial statements. The statement starts with the beginning equity balance, and then adds or subtracts such items as profits and dividend payments to arrive at the ending ending balance. The general calculation structure of the statement is as follows:
Beginning equity + Net income – Dividends +/- Other changes
= Ending equity
This statement is most likely to be issued when the recipients are outside parties, such as creditors, investors, and lenders. These parties are most in need of a complete explanation of what changes have occurred within the equity accounts. The statement is less likely to be issued when the recipients are internal, since they are more interested in management issues.
Contents of the Statement of Changes in Equity
The transactions most likely to appear on this statement are as follows:
Net profit or loss
Dividend payments
Proceeds from the sale of stock
Treasury stock purchases
Gains and losses recognized directly in equity
Effects of changes due to errors in prior periods
Effects of changes in fair value for certain assets
Related AccountingTools Courses
Presentation of the Statement of Changes in Equity
The statement of changes in equity is most commonly presented as a separate statement, but can also be added to another financial statement. It is also possible to provide a greatly expanded version of the statement that discloses the various elements of equity. For example, it could separately identify the par value of common stock, additional paid-in capital, retained earnings, and treasury stock, with all of these elements then rolling up into the ending equity total.
Preparation of the Statement of Changes in Equity
To prepare the statement, follow these steps:
Create separate accounts in the general ledger for each type of equity. Thus, there are different accounts for the par value of stock, additional paid-in capital, and retained earnings. Each of these accounts is represented by a separate column in the statement.
Transfer every transaction within each equity account to a spreadsheet, and identify it in the spreadsheet.
Aggregate the transactions within the spreadsheet into similar types, and transfer them to separate line items in the statement of changes in equity.
Complete the statement, and verify that the beginning and ending balances in it match the general ledger, and that the aggregated line items within it add up to the ending balances for all columns.