Statement of Stockholders' Equity
The statement of stockholders’ equity is a financial statement that summarizes all of the changes that occurred in the stockholders’ equity accounts during the accounting year. It is also known as the statement of shareholders’ equity, the statement of equity, or the statement of changes in equity.
It is one of the four financial statements that need to be prepared at the end of the accounting cycle.
The statement of stockholders’ equity assists the shareholders in making the following decisions:
- Selling additional shares depending on the position of the equity statement: For instance, if a company has already issued all the shares that it was authorized to issue, then it cannot sell additional shares without the approval of the shareholders.
- Control the circulation of its shares: If the company feels that it has too many shares in circulation which are diluting the profits per share or if the company shares have undergone panic selling from investors, the company may decide to buy back a certain number of shares.
- Planning of profit distribution: The company will have to decide the portion of profits it will keep in the business and the amount it will distribute to the shareholders.
- Reviewing an Employee Stock Ownership Plan (ESOP): The ESOP plan is an initiative that gives employees rights to shares. There are limits on the total number of shares kept for this plan, which is duly authorized by the shareholders. The statement of equity helps in keeping track of the number of shares that have already been vested and the review's progress for the remaining amount.
Statement of Stockholders’ Equity Template
Throughout this series of financial statements, you can download the Excel template below for free to see how Bob’s Donut Shoppe uses financial statements to evaluate the performance of his business.
Stockholders’ Equity Equation
The basic accounting equation, as you may know, is:
If we rearrange the original accounting equation, we can get the following result:
This simple equation does a lot in demonstrating that shareholder’s equity is the residual value of assets minus liabilities.
Alternatively, equity can also be directly calculated as the combination of contributed capital (commons stock + preferred stock – treasury stock) and retained earnings (net income + other comprehensive income – dividends paid).
Components of Stockholders’ Equity
There are three main components that we need to look at:
- Share capital or contributed capital
- Retained Earnings
- Net income and dividends
This is the amount received from the shareholders. There can be different types of shareholders including common stockholders and preferred stockholders. In the event of a liquidation, preferred stockholders will receive the priority of payment as compared to a common stockholder. The common stockholder is usually the last one to get paid after all debtholders and preferred stockholders get their due amounts.
Shareholders can also differ based on the class of shares they own. Founder shares or class A shares have more voting rights than for instance the other class of shares.
The actual number of shares issued (also called issued share capital) will not be more than the authorized share capital. The authorized capital is the total number of shares a company is legally authorized to issue as per the company’s articles of association. While the issued share capital will depend on the financing requirements and capital structure decisions of a company.
The difference between the authorized share capital and the issued share capital represents the treasury shares or the shares owned by the issuing corporation.
These represent the accumulated company’s profits that are not paid out as dividends to the shareholders and instead allocated back into the business. Retained earnings could be used to fund working capital requirements, debt servicing, fixed asset purchases, etc.
The retained earnings formula is:
A report called ‘statement of retained earnings is maintained to present the changes in the retained earnings for the financial period. It starts with the accumulated retained earnings balance of the last period, adds the net income/loss to it, and then subtracts the cash or stock dividend payouts from it.
The amount of dividend payments to the shareholders is up to the company. It may even choose not to pay a dividend if it feels that it might require funds elsewhere, e.g. in expanding the factory or investing in a new project, etc. The most common dividend payout option is though either a cash or stock dividend.
The four key dates related to dividend payments are given below:
This is the date of the initial announcement of the dividend. To record this as a journal entry, we will debit the earnings account and credit the dividends payable account.
After this date, the share would trade without the right of the shareholder to receive its dividend. There is no journal entry needed to record this.
This is the date on which the list of all the shareholders who will receive the dividend is compiled. Even here, there is no need for a journal entry to record it.
This is the date on which the actual dividend is received by the shareholder. The journal entry to record this would be to debit the dividends payable and credit cash accounts.
Format of a Statement of Stockholders’ Equity
The statement consists of four sections:
- Beginning balance of stockholder’s equity
- Additions during the period
- Deductions during the period
- Ending balance
Below is an example of the statement of stockholders’ equity for Amazon:
Statement of Stockholders’ Equity Example
We have already seen the presentation of the balance sheet for Bob and his donut shop. Here, we can see what his stockholder’s equity statement looks like:
Points to note:
- Bob started off his business with nothing in capital or retained earnings in the company.
- Bob bought $50,000 of capital stock of the business by investing it in cash.
- During the first month of operations for Bob donut shop, he made a net loss of $ 6,050, which will reduce his shareholder’s equity.
- Bob also decides to pay himself a salary of $ 500, which will again reduce the capital of the business.
1. What is a statement of stockholders' equity?
The statement of stockholders' equity presents a summarized version of the changes in a company's shareholder’s equity over a particular period of time. It starts with the beginning stockholder’s equity balance and ends with the ending balance.
2. What is on a statement of stockholders' equity?
The statement of stockholders’ equity consists of the following sections: Beginning balance of stockholder’s equity Additions during the period Deductions during the period Ending Balance
3. Who uses a statement of stockholders' equity?
The statement of stockholders’ equity is usually prepared for the board members, and they use it to keep track of what has happened with their shareholders' equity. Most public companies also provide a copy of this report to their shareholders.
4. What does the statement of stockholders' equity include?
The following items are included in the statement of stockholders’ equity: - Share capital - Retained earnings - Dividends paid out to shareholders
5. Why is the statement of stockholders' equity important?
The statement of stockholders' equity provides information about the changes in the business's capital each year. It also helps to find out if the company has gone over its assets without accumulating enough earnings. The board members can then keep track of how much money is due to be paid to shareholders as dividends. For example, if a company is showing strong growth in the statement of stockholders' equity, then that shows that they are investing in new projects and increasing their shareholder’s equity.