12.8. Statement of Changes in Owners' Equity

In many situations, a business prepares a "mini" financial statement in addition to its three primary financial statements (income statement, balance sheet, and statement of cash flows). This additional schedule is called the statement of changes in owners' equity. You find this schedule in almost all public companies, because most have relatively complex ownership structures and changes in their equity accounts during the year. Many smaller private companies, on the other hand, do not need to present this schedule.


Owners' equity consists of two fundamentally different sources: capital invested in the business by the owners, and profit earned by and retained in the business. The specific accounts maintained by the business for its total owners' equity depend on the legal organization of the business entity. One of the main types of legal organization of a business is the corporation, and its owners are stockholders. A corporation issues ownership shares called capital stock. The title statement of changes in stockholders' equity is used for corporations. (Chapter 8 explains the corporation and other legal types of business entities.)

Let's consider a situation in which a business does not need to report this statement, to make clearer why the statement is needed. Suppose a business corporation has only one class of capital stock (ownership shares); it did not issue any additional capital stock shares during the year; and it did ...

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