Accounting

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What is Equity and Statement of Change in Equity

Another sub-report included in a company’s financial statements is the statement of changes in equity (it usually appears after the profit and loss statement). This statement, as indicated by its name, lists the causes of changes in the company’s equity during a given period. The statement includes three main elements:

  1. Equity at the beginning of the period.
  2. Changes in equity during the period.
  3. Equity at the end of the period.

As stated above, equity is an item in the right column of the balance sheet. It represents the company’s “liability” to its owners, stemming from the money that they invested in it (share capital) and its accumulated profits that were not distributed to its owners. Changes in equity can therefore occur as a result of:

  1. Injections of money into the company by the owners.

  2. Withdrawal of money from the company by the owners (dividends).
  3. Accumulated profits or period.

As stated above, equity is an item in the right column of the balance sheet. It represents the company’s “liability” to its owners, stemming from the money that they invested in it (share capital) and its accumulated profits that were not distributed to its owners. Changes in equity can therefore occur as a result of:

  1. Injections of money into the company by the owners.
  2. Withdrawal of money from the company by the owners (dividends).
  3. Accumulated profits or losses.

The way a statement of changes in equity is written is illustrated through the following example:

USA Ice Cream’s Balance Sheet as of December 31, 2006 (Sums in thousands of $)

AssetsLiabilities + Equity
Current AssetsLiabilities
Cash50Bank loans60
Equity
Fixed AssetsShare capital30
Machine50Retained earnings (accumulated)10
Total100Total100

 

Assume that the following transactions took place in the company in 2007:

Activity yielded a $10,000 net profit.

  1. The company distributed a $5,000 dividend to the owners.
  2. The company issued additional shares to the owners for $10,000.

In this case, the company’s statement of changes in equity is as follows:

USA Ice Cream’s Statement of Changes in Equity for 2007 (Sums in thousands of $)

Total EquityConsisting of:
Share CapitalRetained Earnings (accumulated)
Balance of equity as of December 31, 2006403010
Net profit in 20071010
Distribution of dividend in 2007-5-5
Issue of shares in 20071010
Balance of equity as of December 31, 2007554015