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
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.
The transactions most likely to appear on this statement are as follows:
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.
To prepare the statement, follow these steps: