This statement helps to understand the wealth of the company owner and how it has changed in the years under consideration. Mainly, there are three sections of this statement that include the following.
Opening balance – (first section)
This balance is brought from last year, so, there is nothing much. However, it’s important to ensure it’s the same as the balance in the last period’s financial statements.
Operational and strategic movement of the balance – (second section)
It’s the most important section of the statement of changes in equity because of the following,
- The profit/loss from the current period is adjusted in the statement. For instance, if there is a profit in the current year, it will be added to the statement of changes in equity. On the other hand, if there is a loss, it will be deducted from the opening balance of this statement. It’s a point where profit/loss from the profit and loss statement is transferred to the balance sheet.
- Any transactions with the business owner are adjusted in this section. For instance, if the business owner has taken out drawings/dividends, it needs to be adjusted here. Further, share buyback, and share issuance are recorded in the same section.
- Similarly, any adjustments in equity are reflected in this section of the financial statement. These transactions may be related to prior period errors and changes in the accounting policies.
This section is important as transactions related to the current period are reflected here.
Closing balance that’s shown on the face of the balance sheet
Finally, the statement of changes in equity shows the closing balance of equity at the end of the period, which is the sum/total of the opening balance, the changes due to profit or loss (+/- in the equity), the change may be due to profit/loss r company’s transactions with the owner in terms of capital.
So, SOCE provides important information to the reader of financial statement in terms of changes in ownership structure over time. Further, it’s an important component of the financial statement that is included in the annual report of the business.