Statement of Changes in Equity: Definition, Function, Components, and Examples

In the world of accounting, financial statements play a crucial role in providing a complete picture of a business's financial condition. One equally important report is the statement of changes in equity, which details changes in shareholders' equity over a specific period.

In this article, Labamu will explore what a statement of changes in equity is, its key components, and how it can help you make better business decisions. Let’s dive in!

Definition of the Statement of Changes in Equity

According to Stripe, the statement of changes in equity is a financial report that shows the changes in a company’s owner’s or shareholders’ equity over a specific period.

This report acts as a kind of “financial diary,” recording how a company’s capital has changed—starting from the opening balance, additions, and deductions, to the closing balance during the reporting period.

These changes can result from various activities such as retained earnings, reserve allocations, issuance of new shares, or dividend distributions.

The statement is particularly important for external parties such as investors, shareholders, or financial regulators, as it provides insight into the company’s financial health and equity growth over time. By understanding this report, capital owners can make more informed business investment decisions.

Typically, the statement of changes in equity is prepared after the income statement and is a key component of a full set of financial statements, along with the balance sheet and cash flow statement.

Functions of the Statement of Changes in Equity

The statement of changes in equity is not merely a financial record—it is also a crucial tool that offers various benefits to both companies and external parties. Below are some of its main functions:

1. Demonstrating Financial Transparency

The statement of changes in equity helps companies present their financial condition transparently to stakeholders such as investors, business owners, and creditors. By detailing changes in equity, this report shows how retained earnings, capital contributions, or dividend distributions affect the company’s overall net worth. This transparency is vital for building trust.

2. Assessing Company Performance

Changes in owners’ equity over time can serve as an indicator of a company's performance. A consistent increase in equity may suggest that the company is generating profits and managing them well.On the other hand, a decrease in equity could signal the need to evaluate the company’s business strategy or operational efficiency.

3. Supporting Decision-Making

The information in this report can serve as a basis for important decision-making. For example, management can determine whether profits should be retained for business expansion or distributed as dividends. By observing equity trends, companies can also assess whether they need to raise additional capital from new investors.

4. Aiding Financial Planning

Understanding how equity changes over a specific period enables a company to develop more effective long-term financial plans.This report helps identify growth patterns or challenges in capital accumulation, allowing companies to better strategize their financing, investment, and profit allocation decisions.

5. Demonstrating Regulatory Compliance

In many jurisdictions, preparing a statement of changes in equity is part of the required financial reporting standards.

By doing so, companies show their compliance with applicable accounting and reporting regulations. This compliance is also crucial during audits or when seeking external investment.

6. Facilitating Financial Analysis

This report serves as an analytical tool for various stakeholders, including financial analysts, auditors, and business consultants. It allows them to examine how corporate decisions—such as profit distributions or share issuances—affect overall equity. The insights from this analysis can be used to assess the company’s financial stability and sustainability.

7. Influencing Investor Decisions

Investors are more likely to trust companies that demonstrate healthy and consistent equity growth. This report provides concrete data that helps investors assess whether a company is a worthwhile investment.Information such as steadily increasing retained earnings can send a positive signal that the company is capable of generating and managing profits effectively.

Statement of Changes in Equity

The Statement of Changes in Equity reflects how business activities during an accounting period affect the owner’s equity. Below are the key elements commonly found in the statement of changes in equity:

1. Opening Balance of Equity

The opening balance represents the owner’s equity at the beginning of the reporting period. This balance reflects the company’s capital after all liabilities are deducted from total assets at the start of the accounting period.

2. Additional Contributed Capital

This refers to additional investments made by the owner during the period. For example, the owner may contribute cash or other assets to support business growth.

3. Net Income or Loss

This is the bottom line from the income statement, which equals revenues minus all expenses, including taxes and interest. If the company earns a profit, it increases equity; conversely, a loss decreases equity.

4. Owner’s Withdrawals

This is the amount the owner takes out of the business for personal use during the period. Withdrawals reduce the capital because they decrease company assets.

5. Dividends

For corporations with shareholders, dividend payments also reduce equity. Dividends may be paid in cash or additional shares.

6. Share Issuance

If the company issues new shares, the proceeds from the sale increase equity. This represents new capital coming in from investors.

7. Other Comprehensive Income

Includes gains or losses not recorded in the income statement, such as foreign currency translation differences, changes in the fair value of investments, or asset revaluations. This component directly affects equity.

8. Other Adjustments

This includes corrections of prior period errors, changes in accounting policies, or other relevant adjustments. Although rare, these are important to maintain the accuracy of the report.

9. Ending Balance of Equity

This is the final value of owner’s equity at the end of the period. It can be calculated as:Opening Balance + Additional Capital + Net Income – Withdrawals – Dividends ± Adjustments

Example of Statement of Changes in Equity

To make it easier to understand, Labamu friends can refer to the simple example below from a privately owned trading company called Toko Sumber Untung for the year 2024.

[Example]

Statement of Changes in EquityToko Sumber UntungFor the Year Ended December 31, 2024

You can use this example as a reference when preparing a simple financial statement. As a business owner, it’s important to get into the habit of regularly making these reports so you can objectively track the growth of your business capital.

To help keep your bookkeeping and financial reports neat and easy to monitor, you can use the Labamu app!

With its complete features—including transaction recording, automatic financial reports, and business campaign management—Labamu is ready to be your reliable partner in managing your business finances. So, download the app now on Google Play or the App Store!