In the world of financial accounting, the statement of changes in equity is a vital window that reveals the financial dynamism of any economic entity. It is not just numbers and tables, but rather an integrated story that reflects how financial activities interact with the company’s strategic values, but have you ever wondered what is behind the numbers that make up this list? Or how do investment decisions, distribution, and retained earnings shape the company’s course? Let us explore together the depth of this list, its importance in providing a transparent and comprehensive picture of the financial situation of companies, and how it contributes to making more accurate and effective strategic decisions. Follow along with us.
Equity can be defined as the amounts invested by shareholders in the company, in addition to the profits accumulated over various financial periods. It is worth noting that this list, which is also known as the list of changes in equity, is one of the basic financial statements prepared at the end of the period or financial year, and documents changes in shareholders’ equity from the opening balance to the final balance for that period.
It is an integral part of the financial statements of any organization or company because it provides vital information about the company’s health and financial sustainability. It also reveals how ownership rights change over a specific period of time, which helps in comprehensively understanding the company’s financial performance and development.
This list helps monitor financial operations that affect the company’s net assets, including: capital and opening balance. Through it, profits, losses, and other financial operations, such as revenues and distributions, can be tracked, which provides a clear view of how the organization manages its financial assets, and how their value changes over time.
It is a main tool that shows the company’s financial ability over time, as it displays changes in capital as a result of additions or withdrawals by shareholders, which highlights the company’s stability and financial performance. It is worth noting that this information helps in making strategic financial decisions related to attracting investments, financing, production, in addition to loan management.
The statement of the owner’s equity forms the basis for preparing many other financial statements, such as: the income statement and the cash flow statement, and is considered the infrastructure that institutions rely on to prepare their comprehensive financial reports, which ensures the availability of accurate and integrated information about the company’s financial position.
This list contributes to clarifying the structure of shareholders and owners within the company, as it shows shareholders’ shares, the distribution of shares, and the changes that occur in them over the various financial periods, which helps in managing the company’s relations with shareholders effectively, and ensuring transparency in the distribution of ownership.
The format of this list can be found in the following table:
| Statement | Capital | Additional capital | the reserve | Retained profits | Total |
| The balance of the first period | XX | XX | XX | XX | XX |
| (+) or (-) additions or reductions to capital during the financial period | XX | ||||
| (-) Personal withdrawals | XX | ||||
| (+) or (-) net profit or loss | XX | ||||
| Cash reserve | XX | ||||
| (-) Dividends | XX | ||||
| Adjustments for previous years | XX | ||||
| Ending balance (net equity) | XX |
The statement of equity consists of several elements that contribute to presenting a comprehensive and clear picture of the company’s ownership and financial performance. These elements include:
Capital at the beginning of the period is the net accumulated capital from previous periods. This number is recorded in the list at the start of the new fiscal year in order to monitor the changes that occurred during the year. It is worth noting that this item is a starting point for measuring the financial performance of the facility throughout the year.
Capital additions include any amounts added to increase capital, such as: issuing new shares.
For example: If the company issues 200,000 shares at a price of 6 riyals per share, while the nominal value of the share is 2 riyals, the increase in the original capital will be 200,000 riyals, while 400,000 riyals will be considered the additional capital.
As for capital reductions, they relate to amounts withdrawn from the establishment’s capital, such as: personal withdrawals from the establishment’s owners, which lead to a decrease in capital.
Net profit or loss reflects the financial performance of the facility during the year, and is calculated through the income statement using the equation:
Net profit or loss appears in the statement to reflect the entity’s financial performance during the year.
The cash reserve is a portion of profits that is maintained in accordance with financial laws, and is calculated as a percentage of net profit. It is worth noting that it appears in the statement of equity twice: once as a reserve, and once as a deduction from retained profits.
For example: If the net profit is 1,000,000 riyals and the reserve percentage is 20%, then the reserve amount will be 100,000 riyals added to the reserve box, and deducted from the retained profits.
These are the profits of the year that have not been distributed and are carried forward to the next year. They appear in the retained profits box at net profit, and are included under the credit side of equity. These profits are also used for the purposes of expansion and growth in the establishment’s business.
These are the amounts distributed to the owners from the year’s profits, and they appear in the list as a deduction from the retained profits because they represent the amounts distributed to the owners.
They include settlements that were made in previous years and were deducted from profits. It is worth noting that if new settlements are made in the new year; They are added to retained profits, and these adjustments affect the final balance at the end of the financial period.
It is the final amount that expresses the owners’ rights after adding or deducting the changes that occurred during the financial period. This balance appears in the statement of financial position. To reflect the true financial position of the facility at the end of the year.
To understand the list of equity, we can give a mathematical example of a hypothetical company called “Al-Najah Saudi Company,” and we will prepare the list for the fiscal year 2024 based on the financial data available for the year 2023.
To prepare a statement of equity, we will break down the calculations as follows:
We now add and subtract these values to arrive at the final value of equity:
1,000,000 + 200,000 – 50,000 – 40,000 + 100,000 – 20,000 + 100,000 = 1,290,000 Saudi riyals.
So, the final value of Al-Najah Saudi Company’s equity for the year 2023 is 1,290,000 Saudi riyals.
On 1/1/2021, the balance of the capital account of establishment (B) was 15,000 riyals. During the year, the owner of the establishment withdrew 5,000 riyals from the establishment’s account for personal purposes, and the net profit of the establishment at the end of the year was 25,000 riyals.
So to calculate net capital at the end of the year, we follow these steps:
| Statement | Value in riyals |
| Capital as of 1/1/2021 AD. | 15,000 |
| (+) Net profit. | 25,000 |
| (-) Personal withdrawals. | 5,000 |
| Net capital as of 12/31/2021. | 35,000 |
This example clearly shows how the owner’s equity of facility (B) was affected during the year by financial operations, as the original capital increased thanks to the net profit achieved, and this increase was reduced by the amount of the personal withdrawals of the facility owner. The end result is an increase in net capital from 15,000 riyals at the beginning of the year to 35,000 riyals at the end of the year.
To prepare the list, we will start with the data for the beginning of the period, then add the financial transactions that took place during the year, and finally calculate the end of the period balance. Finally, we will display the table for the list, and let us assume that there are these numbers:
500,000 (capital) + 100,000 (additional capital) + 50,000 (cash reserve) + 150,000 (retained profits) = 800,000 riyals.
| Statement | Capital | Additional capital | the reserve | Retained profits | Total |
| The balance of the first period | 500,000 | 100,000 | 50,000 | 150,000 | 800,000 |
| Increase capital | 50,000 | 150,000 | 200,000 | ||
| Net profit | 300,000 | 300,000 | |||
| Reserve | 30,000 | 30,000 | |||
| Dividends | 200,000 | 200,000 | |||
| Adjustments for previous years | 50,000 | 50,000 | |||
| End of term balance | 550,000 | 250,000 | 270,000 | 1,150,000 |
The balance of equity at the end of the period equals the sum of the four items in the table above:
550,000 (capital) + 250,000 (additional capital) + 80,000 (reserve) + 270,000 (retained profits) = 1,150,000 riyals.
Thus, the list reflects all changes that occurred in shareholders’ equity during the fiscal year, showing the end-of-period balance.
If you would like to download the list of changes in equity form, simply click here.
Managing the Statement of the owner’s equity requires accuracy and flexibility in displaying and updating data related to the rights of partners and shareholders in the company, but the Qoyod program provides a variety of financial reports that help achieve this goal efficiently, such as:
The Qoyod program provides a system panel that allows these reports to be issued in flexible and accurate ways. Users can obtain reports:
After preparing the reports, Qoyod provides multiple options for maintaining them:
The statement of owners’ equity plays a vital role in accounting, as it provides a comprehensive overview of the development of owners’ equity and the impact of various financial transactions on it. It is worth noting that understanding this list accurately enhances companies’ ability to make informed financial decisions, and gives investors confidence in the accuracy of financial reports. Do not forget that being familiar with its concepts and dealing with them skillfully reflects the efficiency of financial management and ensures the sustainability of financial growth and prosperity. So both accountants and administrators should give this list the attention it deserves to ensure their success in the ever-changing business world.
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