STATEMENT OF CHANGES IN EQUITY
EQUITY is defined as the residual interest in the assets of an entity after deducting all of the liabilities.
Although equity is defined as a residual, it may be subclassified in the statement of financial position.
In a corporate entity, the following subclassifications may be shown separately:
a. Share capital — funds contributed by shareholders equal to the par or stated value
b. Share premium — funds contributed by shareholders in excess of par or stated value
c. Retained earnings which may be unappropriated and appropriated
The holders of instruments classified as equity are simply known as "owners".
The statement of changes in equity is a formal statement that shows the movements in the elements or
components of the shareholders' equity.
An entity shall present a statement of changes in equity showing:
1. Comprehensive income for the period.
2. For each component of, equity, the effects of changes in accounting policies and corrections of errors.
3. For each component of equity, a reconciliation between the carrying amount at the beginning and end of the
period, separately disclosing changes from:
a. Profit or loss
b. Each item of other comprehensive income
c. Transactions with owners in their capacity as owners showing separately contributions
The statement of retained earnings shows the changes affecting directly the retained earnings of an entity.
The statement of retained earnings is now a part of the statement of changes in equity.
The important data affecting the retained earnings that should be clearly disclosed in the statement of
retained earnings are:
a. Net income or loss for the period
b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings
Items directly affecting retained earnings
Net income or loss for the period
Net income is added because it increases retained earnings, and net loss is deducted because it
decreases retained earnings.
Prior period errors
The prior period errors are shown as adjustment of the beginning balance of retained earnings to arrive
at the corrected beginning balance.
If the net income of the prior period is understated, the amount of error is added to retained earnings. If the net
income of the prior period is overstated, the amount of the error is deducted from retained earnings.
Dividends to shareholders
The dividends declared or paid during the year shall be deducted from the retained earnings.
Effect of change in accounting policy
This is shown as an adjustment of the beginning balance of retained earnings.
If the net income of prior period is understated because of change in accounting policy, the effect is added to
the beginning retained earnings.
If the net income of prior period is overstated because Of change in accounting policy, the effect is deducted from
the beginning retained earnings.
Some components of other comprehensive income are subsequently reclassified to retained earnings.
Retirement of treasury shares
If the cost of treasury shares is more than the original issue price, the difference is charged to retained earnings.
Conversion of preference shares into ordinary shares
If the total par or stated value of the ordinary shares is more than the original issue price of the preference shares,
the difference is charged to retained earnings.
Retained earnings appropriated
The amount of appropriation is deducted from the unappropriated balance of retained earnings.
conversely, if the appropriation is subsequently canceled, it is reverted or added back to the unappropriated
balance.
Retained earnings may be appropriated for the following reasons:
a. Legal requirement, as in the case of treasury shares
b. Contractual requirement, as in the case of bond redemption
c. Entity policy, as in the case of an appropriation fo
