Economics Title

Components of the Changes in Equity Statement

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Priya Kaur

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Christian Bien

Learning Objectives

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Purpose
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The statement of changes in equity has the purpose of detailing the changes in the total equity of a business during an accounting period. This financial statement details the change over the period in the five components that make equity: 


  1.  Share capital: The total amount of capital the shareholders have contributed through the buying of shares issued by the business. This includes the sum of Preference shares and Ordinary Shares capital. 

  2. Retained Earnings: The profit after tax is transferred into this account, and dividends paid to shareholders are taken out of this account. This account also shows transfers to and from other reserves. 

  3. Retained Earnings: The balance of the retained earnings account shows the profits not distributed to shareholders and that is retained in the business for future use. If the retained earnings account has a Credit balance, this represents a profit owing to shareholders. If the account has a Debit balance, this represents accumulated losses. 

  4. Revaluation Reserve: This account records gains (increases) in property, plant and equipment (e.g. Land) when they are revalued to their Fair Value. Gains can be transferred to retained earnings. 

  5. General Reserve: This account records profits transferred to or from the retained earnings account. It can be used in the future to pay dividends or to issue bonus shares.

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Format of a Statement of Changes in Equity
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Above is the prescribed format for the statement of changes in equity in Unit 4 Accounting & Finance. Running Horizontally right at the top are the 4 accounts that make up the 3 components of equity. These are: 

  • Share Capital

  • Revaluation Reserve

  • General Reserve

  • Retained Earnings. 

Running Vertically on the extreme left are the narrations of the changes concerning equity that happen during the period. It starts with stating the closing balance of the previous period, and ends with the closing balance of the current period of each of the accounts to give an overall view into the equity changes for each account during the current period. In between are the narrations stating changes that concern equity, and the amounts are recorded under the accounts that directly concern the change in equity. 


Figures in brackets signify the reduction in the balance of an account. E.g Debiting Retained Earnings to account for dividends Paid, Debiting Share Capital to account for Share Issue Costs.

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