Statement of the owner’s equity

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.

What is a statement of owner’s equity in accounting?

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.

What is the purpose of preparing a statement of equity?

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.

Track changes in financial value

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.

Clarifying the financial status of the institution

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.

Basis for other financial statements

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.

Drawing the shareholder structure

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.

Format of the statement of changes in equity

The format of this list can be found in the following table:

Components of the statement of equity

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:

• Opening balance: Known as the registered capital, it represents the balance with which the new financial period begins, and depends on the closing balance of the previous period.
• Net income: represents the net profits achieved by the company during the fiscal year, which were not distributed to shareholders or reinvested.
• Other revenues: include all additional revenues generated by the company during the financial period, which were not recorded in the income statement.
• Capital inflow: Occurs when a company issues shares, or receives additional capital inflows which increase total shareholders’ equity.
• Dividends: These are the profits distributed to shareholders after deducting taxes and expenses, and these distributions are deducted from the total shareholders’ equity.
• Withdrawal of capital: includes any redemption of shares, or withdrawal of capital by shareholders that reduces the total equity.
• Net loss: The losses incurred by the company during the financial year as a result of its operations are recorded here, and the net loss is deducted from the total capital.
• Additional losses: include unrealized losses from financial derivatives, or any other losses not recorded in the income statement.

Notes on the terms of the statement of equity

Capital at the beginning of the period

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 and reductions

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

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 / Loss = Gross Profit – Sum of other direct costs (taxes, interest, operating expenses, rent, equipment, employee salaries).

Net profit or loss appears in the statement to reflect the entity’s financial performance during the year.

Cash reserve

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.

Retained earnings

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.

Dividends

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.

Adjustments for previous years

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.

End of term balance

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.

Example of equity

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.

Company financial statements

• Capital at the beginning of the year 2023: 1,000,000 Saudi riyals.
• Profits earned during the year: 200,000 Saudi riyals.
• Profit distributed to shareholders: 50,000 Saudi riyals.
• Operating losses: 40,000 Saudi riyals.
• Fund flows from operating activity: 100,000 Saudi riyals.
• Owners withdrawal: 20,000 Saudi riyals.
• Capital increase as a result of new investments: 100,000 Saudi riyals.

operations

To prepare a statement of equity, we will break down the calculations as follows:

• Capital at the beginning of the year: 1,000,000 Saudi riyals.
• Adding profits earned: +200,000 Saudi riyals.
• Dividend discount: -50,000 Saudi riyals.
• Adding funds flows from operating activity: +100,000 Saudi riyals.
• Operational loss deduction: -40,000 Saudi riyals.
• Addition of capital increase as a result of new investments: +100,000 Saudi riyals.
• Owners withdrawal discount: -20,000 Saudi riyals.

Final calculation

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.

Another example for sole proprietorships

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:

• Capital balance at the beginning of the year: 15,000 riyals.
• We add net profit: 25,000 riyals.
• We offer personal withdrawals: 5,000 riyals.
• Net capital at the end of the year = capital balance at the beginning of the year + net profit – personal withdrawals.
• = 15,000 + 25,000 – 5,000 = 35,000 riyals.

Statement of equity as of 12/31/2021

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.

Another example of companies of people and money

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:

Data for the beginning of the period (01/01/2021)

• Capital: 500,000 riyals.
• Additional money: 100,000 riyals.
• Cash reserve: 50,000 riyals.
• Retained profits: 150,000 riyals.

Total at the beginning of the period

500,000 (capital) + 100,000 (additional capital) + 50,000 (cash reserve) + 150,000 (retained profits) = 800,000 riyals.

Financial operations during the year

• Capital increase: The entity offered 50,000 shares at a value of 4 riyals per share.
• Part of the capital: 50,000 x 1 riyal = 50,000 riyals.
• In additional capital: 50,000 x 3 riyals = 150,000 riyals.
• Total: 200,000 riyals (50,000 riyals added to the capital, and 150,000 riyals added to the additional capital).
• Net profit for the year: 300,000 riyals.
• Reserve allocation: The reserve ratio is 10% of net profit.
• 300,000 x 10% = 30,000 riyals, added to the reserve and deducted from retained profits.
• Dividends for the year: 200,000 riyals, deducted from retained profits.
• Adjustments for previous years: 50,000 riyals, added to retained profits.

End of term balance (12/31/2021)

Total at the end of the period

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.

Template for statement of changes in equity

If you would like to download the list of changes in equity form, simply click here.

How to manage the Statement of the owner’s equity in the Qoyod program

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:

• Personal Withdrawals: Amounts withdrawn by partners for personal purposes are recorded.
• Buying and selling shares: documents the processes in which the company’s shares are bought and sold, affecting the capital structure.
• Revenues and Profits: Highlights the profits earned from a company’s operating activities.
• Losses and Expenses: Shows the expenses and losses incurred by the company.
• Sources and dates of transactions: Records all financial transactions affecting capital, whether from partners or external financiers.

Issuing reports flexibly and accurately

The Qoyod program provides a system panel that allows these reports to be issued in flexible and accurate ways. Users can obtain reports:

• Overall: Provides a comprehensive overview of all items related to equity.
• Detailed: It allows the analysis of each item separately, which helps in examining the precise details of any change in the Statement of the owner’s equity.

Maintain and distribute reports

After preparing the reports, Qoyod provides multiple options for maintaining them:

• Digitally: Reports can be saved on your computer in various formats (e.g. PDF, Excel).
• Paper: Reports can be easily printed for use in meetings, or to keep a physical record.

Conclusion

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.

It is worth noting that the Qoyod program offers all its customers many options that make them comfortable in their work, such as: electronic invoice systems, as well as points of sale systems, warehouses, customers… and so on, which makes it the best accounting program in the Middle East.

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