In the world of accounting, financial statements play a crucial role in providing a comprehensive picture of a business’s financial condition. One equally important report is the statement of changes in equity, which details changes in shareholders’ equity over a specific period.
In this article, Labamu will discuss what a statement of changes in equity is, its important components, and how it can help you make better business decisions. Read on!
Understanding Statement of Changes in Equity
According to the Stripe page, a statement of changes in equity is a financial report that shows changes in the equity of owners or shareholders in a certain period.
This report serves as a kind of “financial diary” that records how the company’s capital changes—from the initial balance, additions, reductions, to the final balance in that period.
The changes recorded in it can come from various activities such as retained earnings, setting aside reserves, issuing new shares, and distributing dividends.
This report is important for external parties such as investors, shareholders, or financial supervisors because it can provide an overview of the company’s health and capital growth over time. By understanding this report, capital owners can make more informed business investment decisions.
Typically, the statement of changes in equity is prepared after the income statement and is an important part of a set of financial statements, along with the balance sheet and cash flow statement.
Function of Statement of Changes in Equity
The statement of changes in equity is not just a financial record, but also a vital tool that provides various benefits to both the company and external parties. Here are some of its main functions.
1. Demonstrate Financial Transparency
The statement of changes in equity helps companies show their financial condition openly to interested parties, such as investors, company owners, and creditors.
By presenting detailed changes in equity, this report shows how retained earnings, capital increases, or dividend distributions affect the company’s net worth. This transparency is essential for building trust.
2. Assessing Company Performance
Changes in owner’s equity over time can be an indicator of a company’s performance. If equity increases consistently, this may indicate that the company is generating profits and managing them well.
Conversely, a decrease in equity could signal the need for an evaluation of business strategy or operational efficiency.
3. Support Decision Making
The information in this report can be used as a basis for making important decisions. For example, management can determine whether profits should be retained for business expansion or distributed as dividends.
By looking at capital change trends, companies can also evaluate the need for additional capital from new investors.
4. Helps with Financial Planning
By knowing how equity changes over a certain period, companies can prepare more mature long-term financial plans.
This report helps identify growth patterns or obstacles faced in capital accumulation. This allows companies to plan funding, investment, and profit allocation strategies more effectively.
5. Demonstrate Compliance with Regulations
In many jurisdictions, the preparation of a statement of changes in equity is part of the financial reporting standards that must be met.
By preparing it, companies demonstrate compliance with applicable accounting and reporting regulations. This compliance is also important when companies are audited or seeking external investment.
6. Facilitates Financial Analysis
This report is an analytical tool for many parties such as financial analysts, auditors, and business consultants.
Through this report, they can see how company decisions—such as profit distribution or additional share issuance—affect overall equity. The analysis can be used to assess the company’s financial stability and sustainability.
7. Influencing Investor Decisions
Investors will have more confidence if a company can demonstrate healthy and consistent equity growth. This report provides concrete data that can help them assess whether a company is worth investing in.
Information such as increasing retained earnings can provide a positive signal that the company is able to generate and manage profits well.
Components in the Statement of Changes in Equity
The statement of changes in equity reflects how business activities during an accounting period affect owner’s equity. The following are the main elements typically found in a statement of changes in equity.
1. Opening Balance
The opening balance is the amount of owner’s equity at the beginning of the reporting period. This balance reflects the capital the company has after all liabilities are subtracted from total assets at the beginning of the accounting period.
2. Additional Paid-in Capital (Contributed Capital)
This is an additional investment made by the owner during the current period. For example, the owner invests cash or other assets to support business growth.
3. Net Income or Loss
This is the final result of the income statement: revenue minus all expenses, including taxes and interest. If a company makes a profit, its value will increase. Conversely, if the company experiences a loss, its value will decrease.
4. Owner’s Withdrawals
This is the amount the owner withdraws from the company for personal use during the current period. This withdrawal reduces the amount of capital because it reduces the company’s assets.
5. Dividends
If a company is a legal entity and has shareholders, then the distribution of profits in the form of dividends also reduces equity. Dividends can be paid in cash or shares.
6. Share Issuance
If a company issues new shares, the proceeds from the sale of these shares will increase equity. This reflects an influx of new capital from investors.
7. Other Comprehensive Income (Other Comprehensive Income)
Includes gains or losses not recorded in the income statement, such as exchange rate differences, changes in the fair value of investments, or revaluations of fixed assets. This component directly affects equity.
8. Other Adjustments
Ini mencakup koreksi kesalahan laporan keuangan tahun sebelumnya, perubahan kebijakan akuntansi, atau penyesuaian lain yang relevan. Meski jarang terjadi, tapi tetap penting untuk dicantumkan agar laporan tetap akurat.
9. Ending Balance
This is the ending value of owner’s equity at the end of the period. This balance can be calculated using the formula:
Beginning Balance + Additional Capital + Net Income – Withdrawals – Dividends ± Adjustments
Example of Statement of Changes in Equity
To make it easier to understand, Labamu Friends can use the following simple example from a privately owned trading company called Toko Sumber Untung in 2024.
[Example]
Statement of Changes in Capital of Sumber Untung Store for the Year Ended December 31, 2024
| Information | Amount (Rp) |
| Initial Capital (as of January 1, 2024) | 50.000.000 |
| Additional Owner Investment | 10.000.000 |
| Net Profit for the Current Year | 25.000.000 |
| Owner’s Personal Collection | (5.000.000) |
| Final Capital (as of December 31, 2024) | 80.000.000 |
You can use this example as a reference when preparing simple financial reports. As a business owner, it’s important to get into the habit of regularly preparing these reports to objectively monitor the development of your business’s capital.
So, to make your business financial records and reports more organized and easier to monitor, you can use the Labamu application!
With comprehensive features, including transaction recording, automated financial reporting, and business campaign management, Labamu is ready to be your loyal partner in managing your business finances. Download the app now on Google Play or the App Store!
