statement of stockholder’s equity, often called the statement of changes in equity, is one of four?general purpose financial statements?and is the second financial statement prepared in the?accounting cycle. This statement displays how equity changes from the beginning of an accounting period to the end.
The statement of stockholder’s equity displays all equity accounts that affect the ending equity balance including common stock, net income, paid in capital, and dividends. This in depth view of equity is best demonstrated in the?expanded accounting equation.
In other words, the statement of stockholder’s equity is a basic reconciliation of how the ending equity is calculated. How did the equity balance on January 1 turn into the equity balance on December 31?
First, the beginning equity is reported followed by any new investments from shareholders along with net income for the year. Second all dividends and net losses are subtracted from the equity balance giving you the ending equity balance for the accounting period.
As you can see, net income is needed to calculate the ending equity balance for the year. This is why the statement of changes in equity must be prepared after the?income statement.
This statement has four sections:
- — Beginning balance
- — Additions
- — Subtractions
- — Ending Balance
The beginning equity balance is always listed on its own line followed by two indented sections: additions and subtractions. Additions include new investments and net income if the company is profitable. If the company is not profitable, net loss for the year is included in the subtractions along with any dividends to the owners. The last line on this statement always lists the ending equity balance.
Like all financial statements, the statement of stockholder’s equity has a heading that display’s the company name, title of the statement and the time period of the report. For example, an annual income statement issued by Paul’s Guitar Shop, Inc. would have the following heading:
- Paul’s Guitar Shop, Inc.
- Statement of Stockholder’s Equity
- For the Year Ended December 31, 2015
Here is an example of how to prepare a statement of stockholder’s equity from our unadjusted trial balance and financial statements used in the accounting cycle examples for Paul’s Guitar Shop.
As you can see, the beginning equity is zero because Paul just started the company this year. Paul’s initial investment in the company, issuance of common stock, and net income at the end of the year increases his equity in the company. Conversely, his dividends decrease the overall equity.
This ending equity balance can then be cross-referenced with the ending equity on the?balance sheet?to make sure it is accurate.