How does the statement of changes in equity reconcile the opening and closing equity of a company?
Prepare a statement of changes in equity showing movements in share capital and reserves over the period
A focused answer to the H2 Principles of Accounting outcome on the statement of changes in equity. Opening balances, profit for the year, dividends, share issues and reserve transfers, reconciling to closing equity.
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What this dot point is asking
SEAB wants you to prepare a statement of changes in equity, the statement that reconciles a company's equity at the start of the year to its equity at the end, showing every movement in between. It sits between the income statement (which feeds in profit) and the statement of financial position (whose equity section it explains). The central insight is that equity changes for a small set of reasons, profit, dividends, share issues and reserve transfers, and this statement lays them out column by column.
The answer
What the statement does
The statement of changes in equity starts from the opening balances of each equity component and adds or deducts every movement during the year to arrive at the closing balances. Those closing balances are exactly the equity section of the statement of financial position. It answers the question: why did total equity change from last year to this?
The movements
| Movement | Effect on equity | Which component |
|---|---|---|
| Profit for the year | Increase | Retained earnings |
| Loss for the year | Decrease | Retained earnings |
| Dividends paid | Decrease | Retained earnings |
| Share issue | Increase | Share capital (nominal) and share premium (excess) |
| Transfer to a reserve | No change to total | Moves between retained earnings and the reserve |
| Revaluation surplus | Increase | Revaluation reserve |
Profit increases retained earnings; dividends reduce them. A share issue raises share capital by the nominal value and share premium by any excess received. A transfer to a general reserve simply reallocates within equity and leaves the total unchanged.
The column format
The statement is usually presented as a grid: one column per equity component (share capital, share premium, retained earnings, other reserves) and a total column. Each row is a type of movement, and the final row, balance carried down, gives the closing figures that must tie to the statement of financial position.
Examples in context
Example 1. Funding growth with a share issue. A company raises \500,000200,000\ shares at \2.50\ (nominal) and share premium by 200\,000 \times \1.50 = \. Total equity rises by the full \500,000$, and the statement shows clearly that the increase came from new shares, not from trading.
Example 2. Earmarking profit for expansion. A board transfers \50,000$ from retained earnings to a general reserve to signal that those profits are being kept in the business rather than paid out. Total equity is unchanged; only the labelling shifts. The statement of changes in equity records the transfer in the relevant columns, helping users see that distributable profits have been reduced by management choice.
Try this
Q1. State the effect on each equity component of issuing \1\. [3 marks]
- Cue. Share capital up \10,00010,000 \times \0.60 = \6,000$; retained earnings unchanged.
Q2. Opening retained earnings are \80,000\; dividends are \20,000$. Find closing retained earnings. [2 marks]
- Cue. 80\,000 + 45\,000 - 20\,000 = \105,000$.
Q3. Explain why a transfer to a general reserve does not change total equity. [2 marks]
- Cue. Both retained earnings and the general reserve are part of equity, so moving an amount from one to the other relabels equity without altering the total.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original7 marksA company began the year with share capital \200\,000\ and retained earnings \90\,000\, paid dividends of \25\,00050\,000\ shares at \1.40$ each. Prepare the statement of changes in equity.Show worked answer →
The share issue raises share capital by the nominal value and share premium by the excess. shares at \1\; the premium of \0.4050,000 \times 0.40 = \.
| Statement of changes in equity | Share capital | Share premium | Retained earnings | Total |
|---|---|---|---|---|
| Balance b/d | 200,000 | 30,000 | 90,000 | 320,000 |
| Profit for the year | 60,000 | 60,000 | ||
| Dividends paid | (25,000) | (25,000) | ||
| Share issue | 50,000 | 20,000 | 70,000 | |
| Balance c/d | 250,000 | 50,000 | 125,000 | 425,000 |
Closing retained earnings = 90\,000 + 60\,000 - 25\,000 = \125,000= 250,000 + 50,000 + 125,000 = \.
Markers reward the split of the share issue between capital and premium, profit added and dividends deducted from retained earnings, and a closing total equity of \425,000$.
Original5 marksExplain why dividends are shown in the statement of changes in equity rather than the income statement, and how a transfer to a general reserve affects total equity.Show worked answer →
Dividends are a distribution of profit already earned to the owners of the company, not a cost incurred to earn profit. Because the income statement measures the cost of generating profit, dividends do not belong there; they are shown as a reduction of retained earnings in the statement of changes in equity, which tracks how equity moves during the year.
A transfer to a general reserve moves an amount from retained earnings to another reserve within equity. It does not change total equity at all; it merely relabels part of it, signalling that those profits are being earmarked (for example to indicate they are not available for distribution). Both retained earnings and the general reserve are part of equity, so the total is unchanged.
Markers reward the point that dividends are a distribution not an expense, their placement in the statement of changes in equity, and that a reserve transfer reallocates within equity without altering the total.
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