Statement of changes in equity
The statement of changes in equity explains how each equity account moved from its beginning balance to its ending balance during the period.
This financial statement “bridges” two consecutive balance sheets, and both the beginning and ending balances should agree to the balance sheets they are based on.
Investors, creditors, and analysts use it to see how much capital the company raised from or returned to its owners, its dividend policy, and how much of its earnings it retained. Every change it reports falls into one of two groups:
- Transactions with owners in their capacity as owners, such as issuing stock, buying or reissuing treasury stock, and declaring dividends. These change paid-in capital, treasury stock, or retained earnings.
- Comprehensive income: net income, which goes to retained earnings, and other comprehensive income, which goes to accumulated other comprehensive income.
Like the balance sheet, the statement reports book values, not what the company’s shares are worth in the market.
Below is an example of a statement of changes in equity normally prepared using a columnar format:
The columns are the components of equity: typically common stock, additional paid-in capital, retained earnings, accumulated other comprehensive income, and total equity, plus treasury stock (shown as a deduction) when the company holds its own shares and a noncontrolling interest column when it has subsidiaries it doesn’t wholly own. The rows are the period’s changes, from the beginning balance through stock issued, treasury stock bought or reissued, net income, other comprehensive income, and dividends declared, to the ending balance. How each of these transactions affects paid-in capital and retained earnings is covered in detail under equity transactions.
The movements in net income and other comprehensive income should be directly traceable to the statement of comprehensive income.
These rows reflect the closing process at the end of the accounting cycle: revenue and expense accounts are closed to retained earnings through net income, a dividends account (where one is used) is closed to retained earnings, and OCI items are closed to accumulated other comprehensive income.
Example: Solving for dividends declared
A company’s balance sheets show retained earnings of $500,000 at the beginning of the year and $590,000 at the end. Net income for the year was $180,000. What dividends did it declare?
Answer: Beginning retained earnings + net income − dividends = ending retained earnings, so $500,000 + $180,000 − dividends = $590,000, and dividends declared = $90,000. The same rollforward works for any column, including total equity, where each ending balance is total assets minus total liabilities.