The statement of stockholders’ equity is also known by the following names;
- statement of shareholders’ equity,
- statement of equity,
- statement of changes in stockholders’ equity,
- statement of changes in shareholders’ equity,
- and statement of changes in equity.
We usually use these key term interchangeably. Statement of stockholders’ equity is one of the five components of the financial statements.
What is Statement of Stockholders’ Equity?
Statement of stockholders’ equity is a statement showing the movement of all components of the equity. It is the amount of asset remaining after which the liabilities have been settled. In other word, statement of stockholders’ equity equal total assets minus total liabilities.
Another definition has defined the statement of stockholders’ equity as the component of the financial statements that shows the details of all of the variations that occurred in the stockholders’ equity accounts during the financial year.
Purpose of Preparing the Statement of Stockholders’ Equity
The statement of stockholders’ equity serves the shareholders of the company in making the following conclusions:
- Shares Issue Decision
The first purpose is to see whether or not to sell additional shares of a company. Thus, this decision depends on the position of the stockholder’s equity statement.
For example, if a company has already issued all the shares that it was empowered to issue, then it cannot sell extra shares without the approval of the shareholders of the company.
- Assist in Controlling Circulation of Shares
It assists in controlling the circulation of shares of a company in a way that if the company has too many shares in circulation which are thinning the profits per share then it may decide to buy back a certain number of sold shares.
- Help to Plan for Profit Distribution
It also helps in the planning of distribution of profits by determining the portion of profits it will keep in the business and the amount it will distribute among the shareholders of company.
- Keep Track of Number of Shares Invested
The employee stock ownership plan (ESOP) gives employees’ rights to shares. There are certain limits of the total number of shares which is duly authorized by the shareholders that are kept for this plan. This statement helps in keeping track of the number of shares that have already been invested and the review progress for the remaining amount.
What are Components in the Statement of Stockholders’ Equity?
A statement of stockholder’s equity shows the amount at the beginning of the period, changes that occurred during the period, and its amount at the end of the period for each component of equity.
Below are the components of statement of stockholder’s equity:
- Share capital: This is also known as common stock or paid in capital. It is the money collected from the common stockholders at par value.
- Share premium: This is also known as paid in capital in excess of par. It is the money collected from the common stockholders in excess of par value.
- Preference share: This is also known as preferred stock. It is a type of shares that provide a fixed dividend to the preferred stockholders.
- Treasury share: This is also known as treasury stock. It is a stock into which the corporation has bought back from the common stockholders.
- Retained earnings: It is the accumulated profit of a corporation.
- Revaluation surplus: It is from the revaluation of property plant and equipment when a corporate adopt a revaluation model of accounting.
The amounts attributable to owners of the parent entity and the amounts attributable to the non-controlling interest have to be shown separately when statement of stockholder’s equity is to be made for a group of companies.
For each component of statement of stockholder’s equity, the changes resulting from the following must be shown. The changes resulting from:
- Transactions with owners;
- Profit or loss for the period;
- Each item of other comprehensive income.
What are Items Affecting the Statement of Stockholder Equity?
Following items affect the statement of stockholder’s equity.
- Opening Balance
This amount represents the balance of stockholder’s equity reserves at the start of the comparative reporting period as reflected in the statement of financial position of the previous period. The opening balance is unadapted with respect to the correction of previous period errors that are corrected in the current period and also by the effect of changes in accounting policy that are imposed during the year as these are presented individually in the statement of stockholder’s equity.
- Correction of Prior Period Error
An adjustment to opening reserves is made to counter the effect of correction of prior period errors and also they must be presented separately in the statement of stockholder’s equity or they may not be netted off against the opening balance of the equity reserves. In this way amounts presented in the statement of current period statement will be easily reconciled and traced from financial statements of last year.
- Changes in Accounting Policies
As we know that any changes in accounting policies that come in the current year are imposed retrospectively, so for this an adjustment is required to be made in the stockholders’ reserves at the beginning of the comparative reporting period to restate the opening equity balance. It is changed with the amount that would be arrived if the new accounting policy had always been enforced.
- Changes in Share Capital
When a company issues additional share capital during the period, it must be added in the statement of stockholder’s equity however, redemption of shares must be subtracted from the statement and the effects of issuance and redemption of shares should be presented individually for share capital reserve and share premium reserve.
- Restated Balance
The equity that belongs to the stockholders at the beginning of the comparative period after the adjustments. The adjustments that are made owing to changes in accounting policies and correction of errors in prior period.
- Dividends
When the dividend payments are issued or even announced during the period, it has to be deducted from shareholder equity. This is because it represents distribution of wealth that is attributable to stockholders.
- Changes in Revaluation Reserve
Gains and losses that arise due to revaluation during the period must be presented in the statement of stockholder’s equity to the extent that they are recognized outside the statement of comprehensive income. It must be noted here that revaluation gains recognized in the statement of comprehensive income due to reversal of previous impairment losses shall not be presented separately in the statement of stockholder’s equity as it has already been incorporated in the profit or loss for the period.
- Income / Loss for the period
This represents the profit or loss during the period as reported in the statement of comprehensive income and is attributable to stockholders.
- Other Gains & Losses
Other gains and losses (such as actuarial gains and losses) that are not recognized in the statement of comprehensive income may be presented in the statement of stockholder’s equity.
- Closing Balance
This balance represents shareholders’ equity reserves at the end of the reporting period which is also shown in the statement of financial position.
Stockholders’ Equity Formula
The easiest and simplest way of calculating stockholders’ equity is by using the basic accounting equation.
Stockholders’ Equity = Assets – Liabilities
In the above-mentioned formula, the equity of the stockholders is the difference between the total assets and the total liabilities.
Let’s understand it with the help of an example, if a company XYZ has $90,000 in total assets and $50,000 in liabilities, the stockholders’ equity will then be $40,000. This is actually the business’s net worth.
In order to determine total assets for the aforementioned equity formula, there is a need to add both long-term assets as well as the current assets which include cash, inventory and accounts receivables.
Long-term assets include patents, buildings, equipment and notes receivable. These are the assets that should have been held by the business for a year.
And in order to calculate total liabilities for this equity formula, add both current liabilities (accounts payable and short-term debts) and long-term liabilities (bonds payable and notes etc).
How to Prepare the Statement of Stockholder Equity?
Following are the primary information which is needed to prepare a statement of stockholders’ equity.
- Opening balance of equity stock and preference stock
The opening balance of equity and preference stock can be taken from corresponding and comparative figures of the statement of financial position. From there the amounts will be taken to statement of stockholders’ equity.
- New issue of preference and equity stock
When a company issues new preferences and equity stock. It will be shown in the statement of stockholders’ equity by adding in total stockholders’ equity.
- Retained earnings
All the retained earnings either current or past, will be the part of total stockholders ‘equity and it will be added in the statement of stockholders’ equity.
- Treasury stock
If company observes that the value of shares is declining day by day in the market. They will adopt the strategy of buying its own shares by paying to the stockholders. In the statement of stockholders’ equity this treasury stock will be deducted from the opening balance of our stock however, when the company issues the same treasury stock, it will then again be added in the total of stockholders’ equity.
Example of Statement of Stockholders’ Equity
Below is the example of statement of stockholders’ equity of ABC Company:
| ABC Company | |||||
| Statement of Stockholders’ Equity | |||||
| For the Year Ended 31 December 20X9 | |||||
| Share capital US$’000 | Share premium US$’000 | General reserve US$’000 | Retained earnings US$’000 | Total US$’000 | |
| Balance at 31 December 20X8 | 300 | 170 | 150 | 600 | 1,220 |
| Change in accounting policy | – | – | – | (50) | (50) |
| Restated balance | 300 | 170 | 150 | 550 | 1,170 |
| Changes in equity for 20X9 | |||||
| Issue of share capital | 200 | 230 | – | – | 430 |
| Dividend payments | – | – | – | (220) | (220) |
| Profit for the year | – | – | – | 322 | 322 |
| Other comprehensive income for the year | – | – | 11 | – | 11 |
| Balance at 31 December 20X9 | 500 | 400 | 161 | 652 | 1,713 |
Conclusion
Statement of stockholders’ equity helps users of the financial statements to know and distinguish the causes that bring a change in the owners’ equity over the period of time. Changes in shareholder reserves can be noticed from the statement of financial position however, statement of stockholders’ equity exposes significant information about equity reserves that are not presented individually elsewhere in the financial statements. All this information is useful for the users of financial statements in understanding the nature of change in equity reserves.
