Companies prepare financial statements to report on their finances to their stakeholders. Usually, the balance sheet and income statement get preference because they include crucial information. However, companies also prepare two other reports, including the statement of cash flows and the statement of changes in equity.
Although often overlooked, the statement of changes in equity includes critical information about equity balances. Therefore, it is crucial to know what it includes and how to use it.
What is the Statement of Changes in Equity (SOCIE)?
The statement of changes in equity (SOCE) is one of the four primary financial statements companies prepare. As the name suggests, it reports on the fluctuations in equity balances during the year. This statement enlists all accounts or headings under shareholders’ equity in the balance sheet. For each, it includes any movements that have occurred during the period.
Essentially, the statement of changes in equity is a reconciliation statement. This statement reconciles the opening and closing balances on the equity accounts. Similarly, it also provides the grounds for those changes. For example, it may state the reason for an increase in share capital balance is the new issuance of shares during the period.
How does the Statement of Changes in Equity work?
The statement of changes in equity follows a straightforward formula. It starts with the opening balance in a specific equity balance. Then, it adds various items to that balance to reach the closing balance. These items may differ based on the type of underlying balance. For example, retained earnings may include dividends, profits and losses.
The statement of changes in equity segregates the equity balances into different columns. On the other hand, reconciliation occurs from top to bottom. Reconciling items is essential in this report, delivering further information for stakeholders. Usually, these details are only available internally. Therefore, the statement of changes in equity provides additional information regarding equity balances.
How to prepare the Statement of Changes in Equity?
The statement of changes in equity is usually the last financial statement prepared by companies. One of the reasons behind it includes this statement needing information from the others. Primarily, it requires equity balances from the balance sheet and profit or loss from the income statement. The statement of changes in equity may also interact with the statement of cash flows.
Overall, companies use the following steps when preparing the statement of changes in equity.
- Identify the equity balances in the balance sheet.
- Determine the opening and closing balances for those balances.
- Obtain the net income or loss during the period from the income statement.
- Obtain the value of the declared dividend at the annual general meeting.
- Establish any other changes that may contribute to changes in equity balances, including changes in accounting policies, errors, etc.
- After adjusting for these items, ensure the closing balance meets the one on the balance sheet.
Example
Given below is an example of the statement of changes in equity.
|
Share Capital |
Retained Earnings |
Total |
|
| Opening balance at the start of the period |
XYZ |
XYZ |
XYZ |
| New share issues |
XYZ |
XYZ |
|
| Net income/loss during the period |
XYZ/(XYZ) |
||
| Dividends declared during the period |
(XYZ) |
||
| Closing balance at the end of the period |
XYZ |
XYZ |
XYZ |
This example assumes only two equity balances, including share capital and retained earnings. Some companies may have more items to report in these columns as well. On top of that, this example only accounts for one period. Companies can extend this statement further by reporting several periods. Usually, companies include information about two periods in this statement.
Conclusion
The statement of changes in equity is one of the four financial statements. It includes a reconciliation of all equity balances from the balance sheet. Usually, companies prepare this report after all others are ready. The statement of changes in equity is crucial in helping users understand the movements in equity balances.
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