Understanding The Statement Of Changes In Equity: A Comprehensive Guide

To maintain the good financial health of a business, it is important to ensure that financial experts of the business update regular and accurate reports. One of these reports is the one named Statement of Changes in Equity. However, there are many businesses that do not consider this report to be essential as other financial statements like balance sheets or cash flow statements.

In this article, you will learn mainly about the statement of changes in equity and its major uses. Firstly, we will discuss the basic details of the statement of changes in equity. After that, you will come across a formula to calculate a statement of changes in equity for your business. Finally, you will also learn about how to create a statement of changes in equity financial statements. Hence, to learn in detail about the topic, read on through to the end of the article.

What Is A Statement Of Changes In Equity?

To speak generally, a statement of changes in equity helps financial experts to get an understanding and helps shareholders understand the movement of equity within the business. Hence, it is also sometimes called the statement of changes in stockholders’ equity. This statement helps stockholders to make informed decisions on investments for the business.

According to WallStreetMojo.com,

“This primary purpose of Statement of Changes in Equity is to provide details about all the movements in the equity account during an accounting period, which is otherwise not available anywhere else in the financial statements. As such, it helps the shareholders and investors make more informed decisions about their investments.”

You can consider the statement of stockholders equity template as a missing link that is present between the balance sheet and the income statements. This helps stockholders in knowing and understanding the changes in owner’s equity and the movement of equity through the business during the financial reporting period of the business, which is usually one year.

Furthermore, this statement also helps other financial analysts and other managers in the business to get a better understanding of financial statements. Furthermore, you can also understand the various factors that are responsible for getting a change in the equity capital of the company.

Formula For Statement of Changes in Equity

The various factors that are included in the statement of changes in equity include the opening value of the equity, the closing value of the equity, the yearly net income, the dividends that have been paid, and the other financial changes in the organization. Here is the formula:

Closing Balance of Equity = Opening Balance of Equity + Net Income of the business – Dividends +/- Other Changes of the company.

Here, the Opening balance of equity is basically the value of equity capital which is found at the beginning of the reporting period (mostly the financial year). This is also the same as the closing balance of equity of the last period.

The Net Income is the company’s net profit or loss as per the income statement created by accountants and finance experts.

To find out the closing balance of equity, you must subtract the Dividends from the equity balance. This basically represents the wealth distribution among the shareholders.

The closing balance includes the equity capital during the end of the reporting period of last year.

The other changes that are associated with the statement of changes of equity include:

• The effect is due to the various changes in the accounting policies of the company, if any.
• There are also adjustments in the last reporting period. You must capture this separately in the statement of changes in equity.
• You must also include the increase and decrease of share capital during the accounting period. This will help in showing the equity movement during the financial reporting period.
• You will also need to show the changes that are associated with the reserve capital of the business. This includes all the profits and losses that the company has come across in the revaluation stage of the company.

How To Create The Statement Of Changes In Equity?

The website AccountingTools.com recommends –

“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.”

The following are the steps you will need to follow to create the statement of changes in equity:

Step 1: In this step, you will need to find out the value of the company’s equity, which was available at the start of the financial period. This is also the same as the value that is found at the end of the last year’s reporting period. This is also known as the opening balance of equity. This is one of the most important factors that you need to include in the statement of changes in equity.

Step 2: The net income is one of the most important factors that you must not forget to include in the statement.

Step 3: You will then need to find out the value of the dividend that the company’s financial management declared by the end of the reporting period of the business.

Step 4: You will then need to find all the adjustments that are made during the reporting period. These might include the changes made in the accounting policies, error correction of the last period, changes in the share capital of the business, and also the reserve capital.

Step 5: You can now find the closing balance of equity by using the formula used to create the statement –

Closing Balance of Equity = Opening Balance of Equity + Net Income of the business – Dividends +/- Other Changes of the company.

Summing Up

Hope this article was helpful for you in getting a better idea of the statement of changes in equity. If you want to make a statement, just follow the aforementioned steps. This will help the shareholders in getting a better idea of the gains and losses in equity of the company so that they can make better investing decisions.

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