Statement Of Changes In Equity

Statement of changes in equity is one of the financial statements prepared by organizations at the end of each accounting year. Other statements that sum up the financial statements include the statement of financial position, income statement, cash flow statement, notes to account in addition to the statement of changes in equity.

Statement of changes in equity, otherwise called SOCIE for short, provides a detailed view of how the equity structure of an organization changed over the accounting period being reported. The statement of changes in equity includes the transaction affecting equity which is not shown in the income statement and statement of financial position. Examples of such transactions are dividend payment, transfer between classes of equity, share issues, withdrawal and so on.

 

The preparation of SOCIE provides information needed by users of accounting information to make informed decisions – particularly, shareholders and investors who’ll need to make decisions on whether to increase, retain or decrease their investment in the organization. 

 

The Step By Step Explanation of  Statement of Equity

The contents of the statement of changes in equity are as follows:

1. Share capital
2. Share premium
3. Retained earnings
4. Revaluation reserve
5. Prior period adjustments.
6. Other gains and losses

The following transactions may affect the balances of the highlighted contents of the statement of changes in equity. 

• Profit or loss for the reporting period.
• Items of other comprehensive income

Reported profit or loss for the period would increase the equity value if a portion of it is retained in the company instead of distributing to shareholders in the form of dividends.

Now, take note of the following transactions as they involve shareholders of the company:

• Payments of dividend
• Issue of new shares
• Transactions that involve the use of equity shares as settlement.
• Share repurchases and cancellations and,
• Any other transaction that involves owners.

Moving on:

Let me show you the method to compute the statement of changes in equity.

Opening Balance of Equity + Net Profit or Loss + Other Comprehensive Income – Dividends paid +/- Other Changes = Closing Balance of Equity

Note: 

1. – means minus and + means plus.
2. Opening balance of equity refers to the value of equity at the beginning of the accounting period being reported.
3. Other comprehensive income like fluctuations in foreign exchange could result in an increase or decrease in equity.
4. Dividends paid refers to the portion of the company’s profit after tax which is distributed amongst shareholders.
5. Other changes may include:
   1. Share repurchases would result in a decrease in equity
   2. Transfer from one component of equity to another.
   3. The effect of prior period adjustments.
   4. The effect of changes in general reserves may be due to revaluation gain or loss.
   5. Share issues and so on.

 

How To Prepare This Statement.

If you want to prepare the statement of changes in equity, follow the formula I stated earlier i.e.

Opening Balance of Equity + Net Profit or Loss + Other Comprehensive Income – Dividends paid +/- Other Changes = Closing Balance of Equity

1. The first thing you must recognize is the opening balance of equity and this can be obtained from the prior period financial statement. Meaning the preceding year’s financial statement.
2. The next thing is to figure out the profit or loss reported for the accounting period under review.
3. Next, recognize any other comprehensive income presented in the income statement. Other comprehensive income is usually listed right after the net profit or loss in the income statement.
4. What is the dividend policy of the entity? Recognize the dividend declared for the accounting year.
5. Now, you should go ahead and recognize the effects of other changes like the effects of changes in share capital, correction of prior period errors, changes in reserve capital,  changes in accounting policies and others.
6. You’ll have the closing balances of each of the components of equity after recognizing all changes which affect them. Add the individual balances together to get your total equity balance for the reporting period.

Please note:

In an examination question, where other values are provided and you’re asked to find the equity balance alone. A good way to know you have done the right thing is that Assets = Liabilities + Equity on the statement of financial position.

Just before you leave,

In my opinion, you’ll find this helpful:

Watch this tutorial video by the Finance Storyteller showing worked examples of statement of changes in equity.