For companies, the term used is shareholders’ equity whereas for sole proprietors and partnership firms, it is known as owners’ equity. Statement of changes in shareholders’ equity or owners’ equity is the fourth statement of the complete set of financial statements. This statement presents the changes in equity during an accounting period. It is basically a reconciliation of shareholders’ equity at the beginning of an accounting period and at the end of an accounting period. The changes during a period are of two types:
- Changes as a result of transactions with shareholders or owners (for e.g., issue of new shares, issue of bonus shares, buy back of shares, payment of dividend etc.)
- Changes as a result of financial performance of the business (net income and other comprehensive income earned during an accounting period).
Equity and its components
Now you know what the statement of changes in equity is but do you know what equity is? It is simply the residual interest of the owners of a business, also known as the net assets of the business. Equity has two broad components:
- Capital invested by the owners in the business.
- Accumulated profits retained in the business.
The above components are further categorized into several types, of which typically used components are stated below.
- Common stock or ordinary share capital (paid up share capital of a company).
- Share premium (A reserve showing the additional amount received on issuance of shares. For e.g., a company issues shares at $12 per share whereas face value of shares is $10 per share). This issue results in collection of additional $2 per share which is accumulated in a reserve called share premium).
- Discount on issuance of shares (A negative reserve showing the deficit or discount on issuance of shares. For e.g., a company issues shares at $7 per share whereas face value of shares is $10 per share. This issue of shares is at a discount of $3 per share. Paid up capital is increased by $10 per share whereas a negative $3 per share is recorded in a reserve called discount on issuance of shares).
- Treasury stock (a contra account of paid up capital representing value of shares bought back by the company).
- Retained earnings or accumulated profits (These are the accumulated profits that are retained in the business i.e., profits less dividends).
- Accumulated other comprehensive income reserves (for e.g., revaluation surplus, unrealized gain or loss on FVOCI financial instruments, unrealized gain or loss on hedging instrument etc.).
Here is a sample statement of changes in equity for better understanding of this topic.