Statement of Changes in Equity: Purpose & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Issuing a Stock & Accounting for Stock Repurchases

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:03 Definition
  • 0:47 Components and Format
  • 2:01 Format
  • 3:20 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed

Recommended Lessons and Courses for You

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.

Definition

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.

Format

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.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support