Legal Definitions - statement of change in equity

A statement of change in equity (sometimes called a statement of retained earnings) is a financial report that shows how the total value of the owners' or shareholders' stake in a company has changed over a specific period, typically a quarter or a year. It provides a detailed breakdown of the various factors that either increased or decreased this ownership value.

Key elements that cause these changes and are reported in this statement include:

• Net profit or loss: The company's earnings or losses for the period, which directly increase or decrease the owners' equity.
• Dividend payments: Money distributed from the company's profits to its shareholders, which reduces equity.
• Equity withdrawals: Funds taken out of the business by its owners, common in privately held companies, also reducing equity.
• Changes in accounting policies: Adjustments made when a company alters the methods it uses to record financial transactions, which can retrospectively impact equity.
• Corrections of prior period errors: Rectifications of mistakes found in financial reports from previous accounting periods.
• Accumulated reserves and retained earnings: Profits that the company has kept and reinvested in the business rather than distributing to owners.

Here are some examples illustrating how a statement of change in equity is used:

• Example 1: A Small Family-Owned Business

  Imagine "The Daily Grind," a local coffee shop owned by a single family. At the beginning of the year, the family's total ownership stake (equity) in the business was $150,000. Over the year, The Daily Grind generated a net profit of $40,000. However, the family also withdrew $25,000 from the business to cover personal expenses. The statement of change in equity would clearly show the initial $150,000, the increase from the $40,000 profit, and the decrease from the $25,000 withdrawal, resulting in a new total equity of $165,000 at year-end. This statement helps the owners understand how their personal stake in the business grew after accounting for both earnings and personal draws.

• Example 2: A Publicly Traded Technology Company

  Consider "InnovateTech Inc.," a large software company listed on the stock exchange. Their statement of change in equity would reflect how the total value belonging to all shareholders evolved over the fiscal year. This might include a substantial net profit of several hundred million dollars, which increases equity. Simultaneously, the company might have paid out $50 million in dividends to its shareholders, which would decrease equity. Additionally, if InnovateTech discovered a significant accounting error from two years prior that understated their past profits, the correction would be shown as an adjustment, increasing the retained earnings component of equity. This statement provides transparency to investors about how the company's financial performance and capital distribution decisions impact their collective ownership.

• Example 3: A Growing Startup with Multiple Investors

  "GreenWheels," a startup developing electric scooters, has raised capital from several angel investors. In its first year of operation, the company's statement of change in equity would initially show the capital contributions from these investors, significantly increasing the total equity. Despite a net loss in its early stages due to high research and development costs, the statement might also show that the investors agreed to convert some of their initial loans into equity, further increasing the ownership stake. This report helps both the founders and investors track how their collective investment and the company's early financial performance are shaping the overall value of their ownership in the venture.