6 Statement of Changes in Equity
Linking the Income Statement to the Statement of Financial Position
Jacqueline Gagnon
Preparing the Statement of Changes in Equity
Now that you’re getting comfortable with Equity transactions, let’s prepare the Statement of Changes in Equity! You’re already familiar with both components: common shares and retained earnings. It’s just a matter of putting it all together. Let’s go!
- My Turn:
- OuR Ltd. has come to you with their trial balance at 31 December 20X1. They are confused about how to prepare a Statement of Changes in Equity. Luckily, you have learned a bit about this statement in your accounting class and have offered to prepare the Statement of Changes in Equity for them. You find the information below on the trial balance:
-
Account Balance Common Shares 150,000 Retained Earnings 8,067,000 Dividends Declared 50,000 - Additionally, you have calculated net income as $755,000, and you’ve been told that OuR Ltd. paid $40,000 to repurchase common shares during the year.
- Required:
- Prepare OuR Ltd.’s Statement of Changes in Equity for the year ended 31 December 20X1.
| Common Shares | Retained Earnings | Total | |
|---|---|---|---|
| Balance, beginning | 190,000 | 8,067,000 | 8,257,000 |
| Net Income | 755,000 | 755,000 | |
| Dividends Declared | (50,000) | (50,000) | |
| Repurchase of Shares | (40,000) | (40,000) | |
| Net Change | (40,000) | 705,000 | 665,000 |
| Balance, ending | 150,000 | 8,772,000 | 8,922,000 |
Let’s break this down into steps.
- Enter ending Common Shares from the trial balance.
- Enter beginning Retained Earnings from the trial balance.
- Enter changes in equity: net income, dividends, share issuances and repurchases.
- Calculate beginning Common Shares.
- Calculate ending Retained Earnings.
- Calculate the total column.
Now you try!
Your Turn:6—7: YoU
Solution:6—7: Solution
Excellent! You’ve got this. Just one more!
Your Turn:6—8: YeT
Solution:6—8: Solution
Great work!! We are done with the Statement of Changes in Equity, but let’s look at one ratio before we move on. This ratio is used all the time, so pay attention 😊