Statement of Changes in Equity

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 also referred to as a statement of retained earnings. The statement of stockholders’ equity reports on changes in key types of equity over a period of time. It covers the following elements:

• Net profit or loss.
• Dividend payments.
• Equity withdrawals.
• Effect of accounting policies changes.
• Effects of prior accounting period corrections.
• Accumulated reserves and retained earnings.
• Proceeds from the sale of stock
• Treasury stock purchases
• Gains and losses recognized directly in equity

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 balance.

A statement of change in equity can be classified with these changes:

• Contributed capital, the stockholders’ net contributions to the company.
• Retained earnings, net income over the life of the company minus all dividends ever paid.
• Other, consists of amounts that we explain later in the book.
• Noncontrolling interest, the equity of outside stockholders.

Categories in a statement of changes in equity

• Contributed capital represents assets the company received from issuing stock to stockholders (also called shareholders). 

• Retained earnings (also called earned capital or reinvested capital) represent the cumulative total amount of income that the company has ever earned and that has been retained in the business; that is, not distributed to stockholders in the form of dividends.
• Other equity consists of accumulated other comprehensive income (AOCI) and Treasury stock (TS). AOCI is as income that has not been reflected in the income statement and is, therefore, excluded from retained earnings. Treasury stock is the cost of the shares that Berkshire Hathaway has repurchased and not reissued. It can be seen as the opposite of contributed capital. Treasury stock decreases equity when shares are repurchased (hence, the negative sign).
• Noncontrolling interest represents the equity of noncontrolling stockholders who own stock in a company.

Preparation of the Statement of Changes in Equity

To prepare the statement, follow these steps:

• Create separate accounts in the general ledger for each type of equity. Thus, there are different accounts for the par value of stock, additional paid-in capital, and retained earnings. Each of these accounts is represented by a separate column in the statement.
• Transfer every transaction within each equity account to a spreadsheet, and identify it in the spreadsheet.
• Aggregate the transactions within the spreadsheet into similar types, and transfer them to separate line items in the statement of changes in equity.
• Complete the statement, and verify that the beginning and ending balances in it match the general ledger, and that the aggregated line items within it add up to the ending balances for all columns.

The purpose of a statement of changes in equity is to furnish shareholders with information that can further inform their investment strategy. It can be used to identify the par value of common or treasury stocks, clarify retained earnings and strengthen investor trust in your company.