Making reports is one of the most important tasks in the financial industry, including compiling reports on changes in capital (equity).
One of the goals is to assess the current situation of the company.
This report is very necessary in business because the company’s capital will definitely fluctuate, whether it is spending or creating new sources of income.
Statements of changes in equity are quite important for companies because they contain information about money that is not available in other financial reports.
Therefore, every company should compile this report, let alone use company financial software to make it easier to develop strategies to achieve their goals.
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However, do you know what is actually meant by a statement of changes in capital (equity)?
In addition, this article will also present information regarding how to formulate a report on changes in capital along with the steps for preparing it.
Definition of Statement of Changes in Capital (Equity)
Equity is the relevance between the initial balance and the ending balance of capital or shareholder equity.
This is a type of financial report that contains a summary of transactions related to shareholder equity during a certain accounting period. Thus, reports on changes in capital are included in financial accounting, not management accounting , because their use is for external parties.
Movements in retained earnings, while other reserves and changes in share capital such as issuance of new shares and payment of dividends are recorded in this report.
Another definition states that the report on changes in capital is a basic financial report that links the initial capital balance to the ending balance.
The two balances are a list of activities affecting the capital account (equity) during the financial reporting period.
Often this report on changes in equity is considered not too important by some companies.
Evidenced by the many companies neglect to implement it.
But in reality, this report on changes in capital can be a very important instrument for the company.
That’s because the information in the report can provide shareholders with an understanding of the movement of equity within your company.
That way, shareholders can make wiser and more informed decisions.
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Purpose of Report on Changes in Capital
In the report on changes in capital, there is information about the differences between assets and liabilities from one accounting period to the next.
Of course this will make it easier for you to find out the movement of equity in your company.
This information can be obtained from the balance sheet. However, it will not provide details regarding changes that have occurred in equity.
For this purpose, the company needs to make a statement of changes in equity.
Another purpose of the report on changes in capital is to provide shareholders with more information about their investment strategy.
It can be used to identify the par value of common or treasury stock, clarify retained earnings and strengthen investor confidence in the company.
In addition, this report can also help shareholders to see what affects the gain or loss of equity during the accounting period.
Furthermore, this report also enables analysts and other financial report readers to understand the factors that influence changes in equity capital.
A statement of changes in equity will typically include:
- Net profit or net loss.
- Purchase of treasury shares.
- Proceeds from the sale of shares.
- Dividend payment.
- Effect of changes in fair value on assets.
- The effect of correcting errors in previous accounting periods.
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Components of Statement of Changes in Capital (Equity)
The statement of equity generally summarizes the changes in the components of equity which consist of:
1. Initial Balance (Opening)
Beginning balance is the ending balance of the statement of shareholders’ equity in the previous period.
All subsequent additions and deductions are made to the opening balance in the equity statement.
2. Net Income
The next component of the statement of changes in capital is net income.
It represents business income after all operations, and non-operating expenses which are deducted during the accounting period.
You can get the value of net income from the profit and loss report that is generated after recording the finances for a certain period.
3. Other Income
The statement of changes in equity also records any additional money received by the company that is not recorded in the income statement.
These other sources of income include actuarial gains and unrealized gains on financial instruments.
4. Issuance of New Shares
The amount recorded to total shareholders’ equity is when new shares are issued and when there is an increase in shareholder’s equity.
5. Net Loss
Net loss is the loss experienced by the company as a result of its activities in the fiscal year.
This can reduce the company’s total capital and if this happens, it must be recorded in the capital change report.
6. Other Losses
Like any other income, costs or losses incurred by a company but not recognized in the profit or loss must also be recorded in the equity statement.
Examples of other losses within a company are actuarial losses or unrealized losses from financial derivatives.
7. Dividends
The next component is dividends, namely the distribution of profits during the reporting period must be deducted from the equity balance.
This dividend is distributed through approval at the general meeting of shareholders.
8. Withdrawal of Capital
When shares have been redeemed, the amount is automatically deducted from the shareholder’s equity statement because it reduces the company’s overall equity.
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The formula for calculating changes in capital and examples of reports
The formula for reporting changes in capital includes opening and ending equity balances, net profit, dividends, and other changes.
Here is the formula:
Ending Equity Balance = Beginning Equity Balance + Net Profit – Dividend +/- Other Changes
Information:
- Beginning equity balance: represents the amount of equity capital at the beginning of the reporting period. This amount is equal to the ending balance of equity in the previous period.
- Net profit: represents the net profit or loss contained in the income statement for the period.
- Dividend: distribution of profits paid by agreement at the general meeting of shareholders.
- Other changes: include the effects of previous period corrections, changes in share capital, and changes in capital reserves during the period.
- Closing Balance: represents the value of equity capital at the end of the reporting period.
For more details, try to look at the example of a capital change report in the following table:
PT. Mitrakarya Perkasa
Income Statement
December 31, 2001
| Net sales | Rp. 200,000,000 | |
| HPP | Rp. 35,000,000 | |
| Gross profit | Rp. 165,000,000 | |
| Operating expenses | ||
| Production Expenses | Rp. 50,000,000 | |
| Employee Wages Expense | Rp. 30,000,000 | |
| General Expenses | Rp10.000.000 | |
| Total Operating Expenses | Rp. 90,000,000 | |
| Operating profit | Rp. 75,000,000 | |
| Profit before tax | Rp. 75,000,000 | |
| income tax | Rp. 8,000,000 | |
| Net profit | Rp. 67,000,000 | |
Based on the example of the income statement table above, you can then prepare a report on changes in capital as follows:
PT. Mitrakarya Perkasa
Report on Changes in Capital
for the Period of 31 December 2001
| Initial Capital (Opening) | Rp. 235,000,000 | |
| Net profit | Rp. 67,000,000 | |
| Total | Rp. 302,000,000 | |
| Other Losses | Rp. 15,000,000 | |
| Retained earning | Rp. 27,000,000 | |
| Correction Effect | Rp. 3,000,000 | |
| Total | Rp. 45,000,000 | |
| Final Capital (Closing) | IDR 257,000,000 | |
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You should note that the above format is not a standard capital change report format, but depends on the needs of each company.
Steps for Preparing a Report on Changes in Capital
To prepare a statement, follow these steps:
- Create separate accounts in the general ledger for each type of equity for par value of shares, additional capital, and retained earnings.
- Record each transaction in each equity account to a spreadsheet, and identify them in the spreadsheet.
- Aggregate transactions in spreadsheets into similar types, and record them as separate line items in the statement of changes in equity.
- Complete the data and ensure that the opening and ending balances match those in the financial statement ledgers.
So, that’s an article about capital change reports that you need to understand before you start compiling it.
Even though it is considered not very important, this report can assist companies in determining their policy direction. In order not to spend too much time and effort in compiling this report, companies can use the best accounting software according to business needs.