Statement of Changes in Equity (Cambridge International A-Level Accounting)

Statements of changes in equity

Spec point — how to prepare a statement of profit or loss, statement of financial position and statement of changes in equity for a limited company. The business may be a trading or a service business

What is a statement of changes in equity?

• A statement of changes in equity is a statement showing how the equity of a limited company has changed over a year

• It shows the changes to:

  • The share capital
  • The share premium
  • The revaluation reserve
  • The retained earnings
  • The general reserve

• It shows how the profits are used

  • Some of the profits will be distributed to the shareholders as dividends

  • The remaining profits are carried forward to the next financial year as retained earnings

    • Some of the retained earnings might be transferred to the general reserve

Layout of a statement of changes in equity

What are the reasons for the changes in the value of the total equity?

• The equity of the limited company is likely to change due to the following

  • The profit for the year is added to the retained earnings
  • The profit is distributed or paid to shareholders in the form of interim and final dividends
  • Some of the profit for the year is transferred to the general reserve

How are dividends treated on the statement of changes in equity?

• Shareholders get a share or portion of the profits as dividends

• The statement of changes in equity shows the dividends paid to shareholders during the year for any ordinary shares

  • Dividends that are paid halfway through the year are known as interim dividends
  • Dividends that are paid at the end of the year are known as final dividends

• Dividends proposed by the directors to be paid are not to be included in the statement of changes in equity until the amount is paid

How are rights issues and bonus issues treated on the statement of changes in equity?

• A rights issue increases the total equity

  • Increase the share capital and share premium
  • The total equity increases

• A bonus issue does not change the total equity

  • Increase the share capital

  • Decrease the share premium before other reserves

    • Do not use the revaluation reserve

Worked Example On 1 April 2023, P and Q Limited supplied the following information:

• In total, there were 800 000 ordinary shares of $0.75 each
• The balance of the share premium was $100 000
• The balance of the general reserve was $62 000
• The retained earnings amounted to $55 000

On 31 March 2024, P and Q Limited supplied the following information:

• The profit for the year ended 31 March 2024 was $70 000
• On 1 January 2024, an interim dividend of $32 000 was paid
• On 1 February 2024, a bonus issue of shares was made of one ordinary shares for every eight shares held Reserves were maintained in their most flexible form
• On 31 March 2024, $12 000 was transferred from the retained earnings to the general reserve
• On 31 March 2024, the directors proposed the payment of an ordinary share dividend of 10%

Prepare the statement of changes in equity for the year ended 31 March 2024 for P and Q Limited.

Answer:

Identify the key information given on 1 April 2023

• In total, there were 800 000 ordinary shares of $0.75 each

  • Calculate the ordinary share capital on 1 April 2023 by multiplying the number of shares by the price of a share

Ordinary share capital: 800 000 × $0.75 = $600 000

• The balance of the share premium was $100 000

  • This is the opening balance on the statement of changes in equity

• The balance of the general reserve was $62 000

  • This is the opening balance on the statement of changes in equity

• The retained earnings amounted to $55 000

  • This is the opening balance on the statement of changes in equity

Identify the key information given on 31 March 2024

• The profit from operations for the year ended 31 March 2024 was $90 000

  • This is before the finance costs are subtracted

• On 1 January 2024, an interim dividend of $32 000 for the ordinary shares was paid

  • This will decrease the retained earnings

    • The interim dividend was paid in the current year so it is entered on the statement of changes in equity

• On 1 February 2024, a bonus issue of shares was made of one ordinary shares for every eight shares held Reserves were maintained in their most flexible form

  • 800 000 ÷ 100 000 new shares issues
  • 100 000 × $0.75 = $75 000 increase in share capital
  • Decrease the hare premium

• On 31 March 2024, $12 000 was transferred from the retained earnings to the general reserve

  • This will decrease the retained earnings but increase the general reserve

• On 31 March 2024, the directors proposed the payment of an ordinary share dividend of 10%

  • Any proposed dividend at the end of the year that remains unpaid, should not be included on the statement of changes in equity

• Complete the statement of changes in equity using the required format

  • Remember to total up rows and columns
  • Put brackets around values if they are to be subtracted.

Final answer: P and Q Limited Final answer: Statement of Changes in Equity for the year ended 31 March 2024
	Final answer: Share capital Final answer: $**	Final answer: Share premium Final answer: $	Final answer: General Reserve Final answer:****$	Final answer: Retained Earnings Final answer: **$	Final answer: Total Final answer: $
Final answer: On 1 April 2023	Final answer: 600 000	Final answer: 100 000	Final answer: 62 000	Final answer: 55 000	Final answer: 817 000
Final answer: Profit for the year				Final answer: 70 000	Final answer: 70 000
Final answer: Dividend paid				Final answer: (32 000)	Final answer: (32 000)
Final answer: Bonus issue	Final answer: 75 000	Final answer: (75 000)			Final answer: -
Final answer: Transfer to general reserve			Final answer: 12 000	Final answer: (12 000)	Final answer: -
Final answer: On 31 March 2024	Final answer: 600 000	Final answer: 25 000	Final answer: 74 000	Final answer: 81 000	Final answer: 855 000