Equity represents a shareholder’s ownership interest in a corporation. A statement of stockholders’ equity is one of the financial statements along with the income statement, balance sheet and statement of cash flows used to determine the financial health of a business. The statement of stockholders’ equity, also known as a statement of retained earnings, details changes in a company’s equity account. The statement reflects changes in the company’s retained earnings, dividends, preferred and common shareholder accounts.
1. Draft a heading for the statement of shareholders’ equity. Write the name of the company on the first line of the heading. Communicate the name of the statement below the name of the company. Indicate the period covered by the statement of shareholders’ equity. For example, write “for the year ending December 31st, 2011.”
2. Write the name of each stockholder’s equity account in columns. Examples of equity accounts that may appear in a statement of stockholders’ equity include common stock, paid-in capital, retained earnings and dividends. Draft the words “total shareholders’ equity.” This must be the final column that appears on the statement of shareholders’ equity. Draw a line underneath each stockholder’s equity account heading.
3. Indicate the beginning balance in each stockholder’s equity account as it stands at the beginning of the year. Draft the name of each stockholder’s equity account on the left side of the statement of shareholders’ equity. For example, write the account title “issued shares” for common and preferred stock, “net income,” “cash dividends” and “stock dividends.” This allows the company to enter amounts for the period that will be used to calculate the final balance in each stockholder’s equity account.
4. Record the amount that must appear in each shareholder’s equity account. The general ledger and general journal can be used to verify the date and amount of each shareholders’ equity transaction. For instance, if a company issued 1,000,000 common shares that have a $1 par value, then the company must write $1,000,000 under the account for “issued shares.” A company that sells 1,000,000 common shares at $5 per share, when the stock has a $1 par value, must write “$4,000,000” in the paid-in capital account.
5. Add all columns in the statement of shareholders’ equity. For example, add the beginning balance of common shares with “issued shares” and stock dividends, if applicable. Let’s assume a company has a $2,000,000 beginning balance in common stock and a $4,000,000 balance in “issued shares.” In this scenario, the company’s ending common stock balance as of December 31st is $6,000,000. This must be done for every account listed on the statement of shareholders’ equity. Remember, dividends reduce retained earnings and should have parenthesis around the amount to indicate that dividends are subtracted from retained earnings. Also, treasury stock reduces stockholders’ equity and must have a parenthesis around the amount listed, if a company has purchased treasury stock. Let’s assume a company has a beginning balance in treasury stock of ($100,000) and purchases of treasury stock in the period total ($300,000). In this case, the company’s ending treasury stock balance on December 31st equals ($400,000).
6. Calculate the total stockholders’ equity column. Start with the beginning balance as of January 1st. Add items like issued shares and net income to the beginning stockholders’ equity balance. Subtract items like treasury stock and dividends from the beginning stockholders’ equity balance. This result yields the ending balance for the total shareholders’ equity account as of December 31st.
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