What Is a Statement of Equity and How Is It Prepared?

A statement of equity is a financial report detailing the change in a company’s equity over an accounting period, such as a month, quarter, or year. It shows the transactions that increased or decreased the ownership stake in the business. This report is one of the four main financial statements, alongside the balance sheet, income statement, and cash flow statement. It serves as a bridge connecting a business’s profitability with its overall financial position.

The information is required by both U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS), but presentation rules differ. Under IFRS, it must be presented as a separate financial statement, while U.S. GAAP allows companies to present the information within the notes to the financial statements.

Core Components of the Statement

Beginning Equity Balance

The starting point for the statement of equity is the beginning equity balance. This figure is the ending equity balance from the previous accounting period. It represents the cumulative ownership interest in the company up to the start of the new period and serves as the baseline against which all changes are measured.

Net Income or Loss

Net income is the profit a company has earned during the accounting period, calculated by subtracting all expenses from total revenues. When a company is profitable, the net income increases the total equity, reflecting the value generated for the owners. Conversely, if a company incurs a net loss where expenses exceed revenues, this amount decreases the total equity.

Owner/Stockholder Contributions

This component represents the new capital invested into the business by its owners during the period. For a corporation, this occurs through the issuance of new shares of stock to investors. For sole proprietorships or partnerships, it is the additional money or assets contributed by the owners. These contributions increase the company’s equity by boosting the overall capital base of the business.

Owner/Stockholder Distributions

Distributions are payments made from the business back to its owners. In a corporation, these are most commonly seen as dividends paid to shareholders. For sole proprietorships and partnerships, these are referred to as owner’s draws or withdrawals. These payments reduce the company’s equity as they represent a return of capital to the owners.

Ending Equity Balance

The ending equity balance is the final figure on the statement and is calculated after accounting for all the changes throughout the period. It is the sum of the beginning equity balance, plus net income and any additional owner contributions, minus any owner distributions. This resulting number represents the total ownership interest in the company at the end of the accounting period.

Preparing the Statement

Preparing a statement of equity follows a specific sequence of calculations. The process begins with the equity balance from the end of the prior period, which is found on that period’s balance sheet. Next, the net income figure is taken from the current income statement and added to the beginning equity. If the company had a net loss, that amount is subtracted.

After accounting for performance, any new capital from owner or stockholder contributions is added. The final step is to subtract any distributions returned to the owners, such as dividends or withdrawals. The resulting figure is the ending equity balance. For example, if a company starts with $100,000 in equity, earns $20,000 in net income, receives $5,000 in contributions, and pays out $10,000 in dividends, its ending equity would be $115,000 ($100,000 + $20,000 + $5,000 – $10,000).

Connection to Other Financial Statements

Input from the Income Statement

The statement of equity has a direct relationship with the income statement. The income statement culminates in the net income or net loss figure, which is a required input for the statement of equity. It is transferred directly from the bottom line of the income statement and added to the beginning equity balance. This flow of information demonstrates how a company’s profitability directly impacts its overall equity.

Output to the Balance Sheet

The statement of equity provides a figure for the balance sheet. The ending equity balance is transferred directly to the equity section of the balance sheet, which presents a snapshot of a company’s financial position. This transfer ensures the fundamental accounting equation, Assets = Liabilities + Equity, remains in balance. By carrying this figure over, the balance sheet reflects the results of the company’s operations and all other equity transactions that occurred during the period.