Guide to Your Financial Reports – Part 5 Statement of Changes In Equity

The Statement of Changes in Equity records what happens to any profits for the year; whether they are paid out as dividends or kept in the business as retained earnings.  Generally speaking, the higher the equity, the better for the company.  However, shareholder loans can also be treated as part of the equity.  Therefore, it’s possible that, while the company is technically insolvent (more liabilities than assets), if the shareholder loans are recorded as equity, the company is effectively relying on the shareholders to pay its debts as they fall due.

The basic format for your Statement of Changes in Equity is:

Total Equity = Opening Balance + Gain on Sale of Fixed Assets + Profit – Dividends Paid – Loss

Opening Balance The equity position from the end of the last financial year.
Gain on Sale of Fixed Assets Where assets have been sold for more than their cost.
Profit for the Period Carried forward from your Statement of Profit & Loss.
Dividends Paid Any dividends paid out to shareholders during the year.
Loss for the Period Carried forward from your Statement of Profit & Loss.
Total Equity The equity position at the end of the period.

If Total Equity is negative, the company is insolvent and cannot pay out any dividends.  The directors must take action to increase the profitability of the company.

Need more help?

The better you understand your business and your financials, the easier it will be to make more money and ultimately achieve your goals.   We have developed comprehensive resources to enable business owners to fully understand and interpret their numbers.  Need more help? Join our free webinars on financial awareness coaching or talk to us about personalised financial awareness coaching.  Contact Samantha for a call, zoom or meet on 06 871 0793.