The Statement of Shareholder's Equity
The Statement of Shareholder's Equity is one of the four main financial statements prepared during a company's accounting cycle. The Statement of Shareholder's Equity is also known as the Equity Statement, Statement of Owner's Equity (single proprietorship), Statement of Partner's Equity (partnership), and Statement of Retained Earnings and Stockholders' Equity (corporation). The U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires a statement of retained earnings to be prepared whenever comparative balance sheets and income statements are presented.
What are Retained Earnings?
Generally, retained earnings are the accumulated net income of the corporation (proprietorship or partnership) minus dividends distributed to stockholders.
What Does a Statement of Shareholder's Equity Show?
The retained earnings statement explains the changes in a company's retained earnings over the reporting period. The statement breaks down changes in the owner's interest in the organization, and in the application of retained profit or surplus from one accounting period to the next. Line items for the retained earnings statement typically include profits or losses from operations, dividends paid, issue or redemption of stock, and any other items charged or credited to retained earnings. . The Statement of Shareholder's Equity shows the inflows and outflows of capital, including treasury stock purchases, employee stock options and secondary equity issuance.
The Statement of Retained Earnings and Stockholders' Equity
The statement of retained earnings uses information from the income statement and provides information to the balance sheet.
The statement of retained earnings also shows any adjustments that were made to financial statements from prior financial periods in the current period. Adjustments are corrections or abnormal nonrecurring errors that may have been caused by an improper use of an accounting principle or by mathematical mistakes. Normal recurring corrections and adjustments that follow inevitably from the use of estimates in accounting practice, are not prior period adjustments and are not included in the retained earning statement.
Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized, including items like an unrealized holding gain or loss from available for sale securities and foreign currency translation gains or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole.Items included in comprehensive income, but not net income are reported under the accumulated other comprehensive income section of shareholder's equity.
Where Does the Shareholder's Equity Statement Appear?
The retained earnings statement may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule. The statement of shareholder's equity uses information from the income statement and provides information to the balance sheet. Retained earnings are part of the balance sheet under Stockholders Equity (Shareholders Equity) and are mostly affected by net income earned by the company during a specified period, less any dividends paid to the company's owners/stockholders. The retained earnings account on the balance sheet represents an accumulation of earnings since net profits and losses are added/subtracted from the account from period to period. Retained Earnings are part of the Statement of Changes in Equity and are a component of shareholder's equity.
The general equation can be expressed as follows:
Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income.