Statement of Changes in Equity (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
Statement of Changes in Equity
What is a statement of changes in equity?
A statement of changes in equity is a statement showing how the equity of a limited company has changed over a year
It shows the changes to:
The ordinary share capital
The non-redeemable preference share capital
The retained earnings
The general reserve
It shows how the profits are used
Some of the profits will be distributed to the shareholders as dividends
The remaining profits are carried forward to the next financial year as retained earnings
Some of the retained earnings might be transferred to the general reserve
What are the reasons for the changes in the value of the total equity?
The equity of the limited company is likely to change due to the following
The profit for the year is added to the retained earnings
The profit is distributed or paid to shareholders in the form of interim and final dividends
Some of the profit for the year is transferred to the general reserve
How are dividends treated on the statement of changes in equity?
Shareholders get a share or portion of the profits as dividends
The statement of changes in equity shows the dividends paid to shareholders during the year for any ordinary shares and non-redeemable preference shares
Dividends that are paid halfway through the year are known as interim dividends
Dividends that are paid at the end of the year are known as final dividends
Dividends proposed by the directors to be paid are not to be included in the statement of changes in equity until the amount is paid
Are redeemable preference shares included on the statement of changes in equity?
No information about redeemable preference shares is stated on the statement of changes in equity
They are a liability so they are included on the statement of financial position
Payment of their dividends is a finance cost and is included on the income statement
Worked Example
On 1 April 2023, P and Q Limited supplied the following information:
In total, there were 800 000 ordinary shares of $0.75 each
In total, there were 400 000 5% redeemable preference shares of $1 each
The balance of the general reserve was $62 000
The retained earnings amounted to $55 000
On 31 March 2024, P and Q Limited supplied the following information:
The profit from operations for the year ended 31 March 2024 was $90 000
Half of the preference share dividends were paid on 1 October 2023 and the rest were outstanding at 31 March 2024
There were no other finance costs apart from the preference share dividends
On 1 January 2024, an interim dividend of $32 000 was paid
On 31 March 2024, $12 000 was transferred from the retained earnings to the general reserve
On 31 March 2024, the directors proposed the payment of an ordinary share dividend of 10%
Prepare the statement of changes in equity for the year ended 31 March 2024 for P and Q Limited.
Answer
Identify the key information given on 1 April 2023.
In total, there were 800 000 ordinary shares of $0.75 each
Calculate the ordinary share capital on 1 April 2023 by multiplying the number of shares by the price of a share
Ordinary share capital: 800 000 × $0.75 = $600 000
In total, there were 400 000 5% redeemable preference shares of $1 each
Redeemable preference shares are liabilities so they do not appear on the statement of changes in equity
The balance of the general reserve was $62 000
This is the opening balance on the statement of changes in equity
The retained earnings amounted to $55 000
This is the opening balance on the statement of changes in equity
Identify the key information given on 31 March 2024.
The profit from operations for the year ended 31 March 2024 was $90 000
This is before the finance costs are subtracted
Half of the preference share dividends were paid on 1 October 2023 and the rest were outstanding at 31 March 2024
The full dividend is a finance cost for the year as it was owed that year
Regardless of how much of it was actually paid
Calculate the dividends by multiplying the percentage by the number of shares and then multiply by the value of a share
5% × 400 000 × $1 = $20 000
There were no other finance costs apart from the preference share dividends
Subtract the dividends for redeemable preference shares from the profit from operations
Profit for the year: $90 000 - $20 000 = $70 000
This will increase the retained earnings
On 1 January 2024, an interim dividend of $32 000 for the ordinary shares was paid
This will decrease the retained earnings
The interim dividend was paid in the current year so it is entered on the statement of changes in equity
On 31 March 2024, $12 000 was transferred from the retained earnings to the general reserve
This will decrease the retained earnings but increase the general reserve
On 31 March 2024, the directors proposed the payment of an ordinary share dividend of 10%
Any proposed dividend at the end of the year that remains unpaid, should not be included on the statement of changes in equity
Complete the statement of changes in equity using the required format. Remember to total up rows and columns. Put brackets around values if they are to be subtracted.
P and Q Limited Statement of Changes in Equity for the year ended 31 March 2024 | ||||
Ordinary share capital $ | General Reserve $ | Retained Earnings $ | Total $ | |
On 1 April 2023 | 600 000 | 62 000 | 55 000 | 717 000 |
Profit for the year | 70 000 | 70 000 | ||
Dividend paid | (32 000) | (32 000) | ||
Transfer to general reserve | 12 000 | (12 000) | ||
On 31 March 2024 | 600 000 | 74 000 | 81 000 | 755 000 |
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