Equity can be defined simply as the money invested by shareholders in a company and includes all profits accumulated over the different financial periods of the company. A statement of equity, also known as a statement of changes in equity, is a financial statement prepared by the company with other significant financial documents at the end of the financial period or year that documents changes in shareholders’ equity from the opening balance to the balance at the end of the financial period.
This change in equity was caused by several factors, the most important of which are: profits earned, dividends, stock and capital flows, withdrawal of owner’s equity or capital, net losses, etc. Changes in owner’s equity can be known by comparing the net value on the balance sheet from year to year, but without knowing the reason for these changes, a statement of equity is prepared to explain the reason for these changes.
Components of the Equity Statement
The equity statement is divided into several components that contribute to drawing a comprehensive and clear picture of the company, its ownership, its financial operations, and its impact on the company’s ownership and financial performance. These components are as follows:
1: Opening Balance
It is the balance at the beginning of the financial period, which is the same as the closing balance of the shareholders’ equity statement for the previous year. All additions or subtractions from the current financial year are made on the opening balance in the equity statement.
2: Net Income
Also known as earned earnings, it is the increase in the opening balance of the financial period, which is the total profits achieved by the company during the financial year that were not distributed to shareholders or reinvested, and is calculated after subtracting all operating and non-operating expenses. The value is obtained from the income statement (or profit and loss statement), which is prepared at the end of the financial year.
3: Other income
Represents all additional income generated by the company during the financial period and is calculated separately from net income if not documented in the income statement. These other incomes include unrealized profits from financial tools.
4: Capital Flow
New shares, capital inflows, or additions to a company’s equity can occur during the financial period, so they must be calculated to be added to the total equity.
5-Dividends
They are the profits that are distributed to the shareholders of the company (after deducting taxes and expenses) as a result of their investment in its shares. These distributions reduce the company’s total shareholders’ equity and are therefore deducted from the statement of shareholders’ equity.
6: Withdrawal of profits or capital
Any redemption of shares, dividends, or capital withdrawals by the shareholders of the company is deducted from the statement of shareholders’ equity, as it reduces the total equity of the company.
7-Net Loss
The net loss is deducted from the statement of shareholders’ equity because it reduces the total capital of the company. Net loss is the total loss incurred by a company during the financial year as a result of its operations.
8-Additional losses
The company may incur other losses that are not documented in the income statement just as it receives other profits and income, and these losses affect the value of equity and therefore must be counted in the statement. Includes unrealized losses from financial derivatives.
Preparation of the statement of equity
Preparing a statement of equity requires strict procedures and the collection of significant financial information. The statement is often prepared on the basis of information from the main financial statements, such as the income statement, the financial statement, and the cash flow statement. In order to prepare the statement, the following steps must be taken:
1-Ingredient identification
The first step is to identify and estimate the main financial components included in the statement, such as earnings earned and dividends, dividend withdrawals, and others.
2-data collection
In the second step, financial data related to each component of equity is collected.
3: Analysis and classification
In the third step, this collected data must be analyzed and classified accurately and in detail according to each component of the statement.
4: Presentation and Advertising
The analyzed data is then organized and formatted in a way that is easy to understand and read, and then presented in the form of a structured and comprehensive financial statement.
5: Documentation and Report
In the final step, all the data used is documented, the information is accurate, and detailed reports are prepared explaining the changes in equity and the reasons behind them.
The importance of the statement of equity
The equity statement is an essential component of the financial data set of any institution or company, and its importance lies in the fact that it is a tool that shows many aspects vital to the company’s health and financial sustainability. It provides a comprehensive and accurate view of how equity changes over a specific period of time, which contributes to understanding the company’s financial performance and development. The importance of the statement of property rights can be summarized by the following points:
1. Identification of changes in financial value
The intellectual property statement helps to track operations that have taken place on the net assets of the enterprise (capital or opening balance of the enterprise) and to understand how they are affected by profits, losses, and any financial operations from income or distributions in the company.
2: Shows the financial condition of the institution
It shows the company’s financial capacity, as it shows how the capital changes over time, from additions or withdrawals made by shareholders, which shows the stability of the company and its financial performance, which helps guide financial decisions related to attracting foreign investments, financing, production, granting or requesting loans, and others.
3: Consider the basis of many other financial statements.
A lot of important financial statements for institutions are prepared based on the statement of equity.
4. Understand the impact of a company’s financial performance.
The statement helps evaluate the company’s performance and financial capacity after understanding the impact of changes on equity; it shows the company’s financial profits and losses, how they affect equity, and gives a clear indication of the company’s ability to achieve sustainable profits.
5: Shareholder structure drawing
The statement helps in drawing the structure of shareholders and owners in the company, as it shows their shares, the distribution of shares among them, and the changes that occur in this over the different financial periods.
6-track earnings channels and usage channels
The statement shows the company’s profits from the various channels; it shows the profits earned along with any additional profits or revenues that are not recorded in the income statement, and the channels of disbursement of these profits; it shows the distributed profits along with any losses incurred by the company, whether they are recorded in the income statement or not, and this paints a comprehensive and clear picture of the company’s growth and progress.
A computational example to enhance menu understanding
This computational example can be put forward to understand the statement of equity
Suppose we have a company called “Great Example Company,” and we want to prepare a statement of equity for the current financial year (2024):
- Registered capital at the beginning of the year 2023: $500,000
- Year-round earnings: $100,000
- Dividends to shareholders: $30,000
- Operating losses: $20,000
- Funds flows from operating activity: $50,000
- Withdrawal of owners: $10,000
- Capital increase due to new investments: $50,000
The calculations can be broken down as follows:
- Registered capital at the beginning of the year: $500,000
- Add earned earnings: +$100,000
- Dividend Rebate: -30,000 USD
- Deduction of operating losses: -$20,000
- Add Money Flows: $50,000+
- Owners Draw Discount: -$10,000
- Add Capital Increase: +50,000 USD
By doing the calculations, you will get the final value of the equity of the great example 2023, which can be used to provide a deeper understanding of the changes in capital, profits, losses, and financial flows of the company during this year.
Positive shares on the statement are seen as an indicator of financial viability and the ability to cover obligations. Negative shares refer to potential bankruptcy or inability to cover costs and expenses in the enterprise, and this contributes to significant financial decisions of the company; for example, if the company is unable to demonstrate its ability to support itself financially without the owner’s capital contributions, creditors can review lending to the company.
Conclusion
The equity statement helps institutional owners, interests, and investors make informed and data-driven decisions about future investments and assess the financial stability of the company. It determines the company’s overall financial health and stability and provides a comprehensive understanding of how profits, earnings, and losses are distributed, which contributes to understanding and analyzing the company’s performance and managing its funds effectively.
Understanding and analyzing the statement of equity also promotes transparency and trust among stakeholders and helps them guide the company towards development and sustainability in the market, as it helps them when making business decisions, such as expansion and diversification.
The Qoyod website helps you prepare a statement of equity for your organization. Just activate the Qoyod accounting system and try it for free for 14 days to get the statement prepared specifically for your organization, showing you the financial performance of your company from all aspects and helping you understand the changes to help you make the right financial decisions for the growth and success of your organization.
