Introduction to the Statement of Shareholders’ Equity
The statement of shareholders’ equity, also referred to as the statement of stockholders’ equity, is a financial report that is associated with stockholdings and investments into a company. Generally accepted accounting principles (GAAP) requires the composition of the statement of shareholders’ equity in addition to the income statement, balance sheet, and statement of cash flows. Depending on the preferences of the preparer, the statement of shareholders’ equity may appear as its own document or as an inclusion on the balance sheet or income statement.
The statement of shareholders' equity represents changes in shareholders' equity from the beginning to the end of a period. The change in equity from the beginning to the end of a period is the result of netting all the components that make up equity: capital stock, treasury stock, retained earnings, and certain gains and losses. Retained earnings represents the undistributed portion of an organization’s net income over its entire history. Therefore, each year that a company reports net income but does not pay that out entirely as dividend, retained earnings increases. A dividend is a distribution of a corporation's earnings in the form of cash, stock, or property to the stockholders as voted on by the board of directors. While income, net of dividends declared, increases retained earnings, net losses decrease retained earnings. To put it simply, a company's retained earnings represents the income left over after accounting for all expenses and dividends declared. Companies typically reinvest retained earnings in the company to facilitate additional growth.
Thus, the statement of shareholders' equity allows shareholders to see how their investments are performing. This information is also useful for the company itself to make decisions regarding future issuance of stock shares.