Statement of Changes in Equity: Purpose & Examples

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  • 0:03 Definition
  • 0:47 Components and Format
  • 2:01 Format
  • 3:20 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Companies must prepare a number of financial statements to comply with accounting regulations. In this lesson, you'll learn about one of these statements, the statement of changes in equity.


Mr. I. Share has some extra money and wants to invest in the shares of another company. He wants to find out as much as he can about the company before he invests. He knows about two financial statements he can look at for more information:

  1. An income statement, where a company's revenue and expenses are recorded
  2. A balance sheet, which shows a company's assets, liabilities, and shareholders' or owner's equity

Equity is the difference between assets and liabilities from one period to the next. While Mr. Share can see the changes in equity from one year to the next by looking at the balance sheet, it does not provide him with the details about the changes. This is why a statement of changes in equity is helpful.

Components and Format

A company's statement of changes in equity is separated into:

  1. Changes that affect the company's share capital
  2. Changes that affect the company's retained earnings (the amount of profit retained since the company started)

The statement of changes in equity records many components over a period, including:

  • Total income including profit or loss: Taking all the profits and subtracting all the losses

  • The effect of changes in accounting policies (the effect of retrospective, or past, changes): Say a company decided to change its inventory costing system from last-in-first-out (LIFO) to first-in-first-out (FIFO). Since the change affects past income, the company must address the change retrospectively and disclose its impact on the statement of changes in equity.

  • The correction of any errors: A potential investor would need this information to make an informed decision.

  • Additional money invested by owners: The company would disclose the details of these transactions in the statement of changes in equity as well.

  • Dividends: The statement of changes would also include the dividends, or company earnings distributed to shareholders, which decreases the retained earnings balance.


Now that we know the components of the statement of changes in equity, let's look at an example of how it all fits together. Let's assume that Mr. Share is looking at investing in the Page Book Company and wants more information about the change in its equity between last year and this year.

Page Book Company had the following information for the current year:

  • Share capital, January 1: $50,000
  • Retained earnings, January 1: $500,000
  • Correction of a prior period error: $7,000
  • Change in accounting policy: $7,500
  • Total comprehensive income for the period: $90,000
  • Additional shares issued: $30,000
  • Dividends paid to existing shareholders: $25,000

Let's prepare the Page Book Company's statement of changes in equity.

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