Statement of Changes in Equity

These lectures cover statements of stockholders’ equity including retained earnings, treasury stock, other comprehensive income, capital stock, additional paid in capital.

Statement of Changes in Equity

Owners’ Equity

The owners’ equity (stockholders’ equity) section is one of the most difficult sections to prepare and understand. This is due to the complexity of capital stock agreements and the various restrictions on stockholders’ equity imposed by state corporation laws, liability agreements, and boards of directors. Companies usually divide the section into six parts:

  • 1.CAPITAL STOCK. The par or stated value of the shares issued.
  • 2.ADDITIONAL PAID-IN CAPITAL. The excess of amounts paid in over the par or stated value.
  • 3.RETAINED EARNINGS. The corporation’s undistributed earnings.
  • 4.ACCUMULATED OTHER COMPREHENSIVE INCOME. The aggregate amount of the other comprehensive income items.
  • 5.TREASURY STOCK. Generally, the cost of shares repurchased.
  • 6.NONCONTROLLING INTEREST (MINORITY INTEREST). A portion of the equity of subsidiaries not wholly owned by the reporting company.

For capital stock, companies must disclose the par value and the authorized, issued, and outstanding share amounts. A company usually presents the additional paid-in capital in one amount although subtotals are informative if the sources of additional capital are varied and material. The retained earnings amount may be divided between the unappropriated (the amount that is usually available for dividend distribution) and restricted (e.g., by bond indentures or other loan agreements) amounts. In addition, companies show any capital stock reacquired (treasury stock) as a reduction of stockholders’ equity. Accumulated other comprehensive income includes such items as unrealized gains and losses on available-for-sale debt investments and unrealized gains and losses on certain derivative transactions. Noncontrolling interest  is also shown as a separate item (where applicable) as a part of equity.

The ownership or stockholders’ equity accounts in a corporation differ considerably from those in a partnership or proprietorship. Partners show separately their permanent capital accounts and the balance in their temporary accounts (drawing accounts). Proprietorships ordinarily use a single capital account that handles all of the owner’s equity transactions.