A financial statement is prepared by a business to summarize its financial activities in a format that allows the reader to more easily determine the business's financial standing. The statement of shareholders' equity identifies the items on the equity portion of the balance sheet and summarizes the changes to each balance over a period of time. There are six common categories included on a statement of shareholders' equity.
Preferred stock is a class of stock whose holders receive dividends from profits before common stockholders do. In the case of a company's going out of business, preferred stockholders are given priority in claiming assets.
Common stock is all stock other than preferred stock. Common stockholders are given voting power in shareholder elections.
Additional Paid-In Capital
Additional paid-in capital is the amount paid in excess of the par value of both preferred and common stock. For example, if the par value of a stock is $100 but was purchased by investors by $110, $100 would be recorded under a stock account, and $10 would be recorded as additional paid-in capital.
Retained earnings are the amounts that a business earns that have not been distributed as dividends. Retained earnings are often held so a business can reinvest in its development or pay debt. Retained earnings is a summary of the changes in net income.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is the amount of nonowner changes in equity that occur other than net income. Unrealized gains or losses on investments are examples of items that fall under this category.
Treasury stock is stock that a business issues to investors and then repurchases. A business could purchase back stock to sell or give to employees or to adjust the market price of the company's stock.
Summarizing the Information
A statement of shareholders' equity is prepared by creating columns for the categories listed above. After listing the period's beginning balance in the first row, list any items that would cause changes to equity such net income, dividends on preferred and common stock, the issuance of additional stock and the purchase of treasury stock as additional rows as a part of the equity column that it changes. Sum your column and row totals to complete the statement.
The purpose of the statement of shareholders' equity is to provide the sources of changes to accounts listed in the equity section of the balance sheet. A good check to see if your statement of shareholders' equity is correct is to make sure that the ending balance for total stockholders' equity is the same as the ending balance of equity section of the balance sheet.