The statement of stockholders’ equity is a display of the equity changes throughout an accounting period. It is the amount invested in the business.
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A statement of stockholders’ equity is one of the four financial statements prepared in the final stage of the accounting cycle by every business. Stockholders’ equity is the amount of business assets which its stockholders own. It is the amount invested by the owner in the business.
The statement of stockholders’ equity is a display of all accounts of equity which affect its ending balance. These accounts include common stock, dividends, net income, and paid-in capital. It is also known as statement of changes in equity because it shows how the changes in equity take place throughout one accounting period. It basically is a reconciliation of the way in which ending balance is calculated.
The beginning equity, new shareholder investments, and net income of the year are reported first. Then, all net losses and dividends are subtracted from the equity balance. This gives the accounting period’s ending balance of equity. The requirement of net income is evident to calculate the ending equity balance. This is the reason why income statement should be prepared before the statement of stockholders’ equity.
The formula used for calculating stockholders’ equity is:
Stockholders’ Equity = Assets – Liabilities
Stockholders’ equity can therefore be defined as the residual interest which remains in business assets after subtracting its liabilities. Its components include contributed capital, retained earnings, preferred stock, and other accumulated comprehensive income.
This formula assesses the amount of net business assets which are owned by its shareholders. It depicts how the capital and profit is utilized by a business. High stockholders’ equity on the balance sheet indicates that most business funds come from internal sources and the amount of external debt is less.
The statement of stockholders’ equity has four sections:
- Beginning Equity Balance: Listed on its own line
- Additions: Such as new income, new investments, etc. if the business is in profit
- Subtractions: Such as net loss, dividends, etc. if the business is not in profit
- Ending Equity Balance: Listed in the last line
The heading of the statement of stockholders’ equity is displayed in three lines, each line representing the business name, statement title, and time period of report in that order. The first line of the heading shows the name of the business. Sole proprietors use the statement title as “Statement of Owner’s Equity”. Partnerships use it as “Statement of Partners’ Equity” whereas corporations use it as “Statement of Stockholders’ Equity”. The third line is displayed as “For the Year Ended” which shows that the information presented in the statement is for a specific period of time. For example,
Statement of Stockholders’ Equity
For the Year Ended December 31, 2018
The statement of stockholders’ equity thus shows the capital owned by business stockholders at the beginning of the period, the changes which affect this capital, and the capital resulting at the end of the said period.