Prepare a statement of changes in equity
Reconcile each equity component from opening to closing balances using profit, share issues, dividends and reserve movements.
Section 3.1 · Preparation of financial statements
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons map all five Topic 3.1 objectives: financial-statement purpose; partnership changes; clubs and societies; manufacturing accounts; and limited-company financial statements and notes. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 adjustment and statement skills: apply accruals, distinguish capital from revenue, reconcile balances, and keep each entity's owners' funds separate from income and cash.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A company makes a bonus issue by transferring $8,000 from retained earnings to share capital. Does total equity increase?
What you will learn
- Reconcile opening and closing share capital and reserves
- Show profit, dividends and share issues in the appropriate equity components
- Link closing equity to the statement of financial position
Roll each component forward separately
A statement of changes in equity explains movements in share capital and reserves between reporting dates. Start with opening balances, add share issues and profit for the period to the appropriate columns, subtract dividends and other distributions from retained earnings, and record reserve transfers or revaluation movements in the relevant component.
A rights issue or bonus issue may affect share capital and share premium differently; use the issue price, nominal value and issue terms supplied. A bonus issue transfers an amount between reserves and share capital but does not raise new cash. Do not count it as revenue or profit.
Tie the statement to the financial position
Closing balances in the statement of changes in equity should equal the equity section of the statement of financial position. Profit for the year should agree with the statement of profit or loss, while distributions should follow the applicable recognition and timing requirements.
A declared but unpaid dividend may have different recognition depending on when a present obligation arises under the applicable reporting rules; follow the question's stated treatment. Keep a proposed future distribution from being recorded automatically as though cash has already been paid.
Pause and explain
Opening retained earnings $30,000, profit $11,000 and dividends paid $4,000. What is closing retained earnings before other movements?
Worked example
Opening share capital is $120,000, share premium $0, retained earnings $45,000 and revaluation reserve $10,000. The company issues shares raising $12,000, earns profit $28,000, pays dividends $9,000 and revalues an asset upward by $7,000 into the revaluation reserve. Calculate closing equity components and total.
Show the worked solution
- Share capital/share premium issue is $12,000 total; the exact split requires the nominal value and issue price, so keep the issue allocation as provided.
- Retained earnings = $45,000 + $28,000 − $9,000 = $64,000.
- Revaluation reserve = $10,000 + $7,000 = $17,000; total equity = $120,000 + $12,000 + $64,000 + $17,000 = $213,000.
Answer Closing total equity is $213,000. Allocate the $12,000 share issue between share capital and premium only when issue terms provide that split.
Try a topic test
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Opening share capital $75,000, retained earnings $28,000 and general reserve $5,000. Profit is $16,000, dividends $6,000 and $3,000 is transferred from retained earnings to general reserve. Calculate closing components and total equity.
Give me a hint
Show the transfer as a decrease in one reserve and increase in another; it does not change total equity.
Compare my reasoning
- Retained earnings = $28,000 + $16,000 − $6,000 − $3,000 = $35,000.
- General reserve = $5,000 + $3,000 = $8,000.
- Share capital remains $75,000; total equity = $75,000 + $35,000 + $8,000 = $118,000.
Closing share capital $75,000, retained earnings $35,000, general reserve $8,000; total equity $118,000.
Look for these in your work
- Profit and dividends applied
- Reserve transfer balanced
- Total equity reconciled
Opening share capital is $100,000 and retained earnings $38,000. The company issues shares for $18,000, earns profit $25,000 and pays dividends $7,000. Ignore premium split and other reserves; calculate closing total equity.
Give me a hint
Add share-issue proceeds to equity and roll retained earnings forward.
Compare my reasoning
- Closing retained earnings = $38,000 + $25,000 − $7,000 = $56,000.
- Closing share capital and premium combined increase by $18,000.
- Total closing equity = $100,000 + $18,000 + $56,000 = $174,000.
Closing total equity is $174,000; the exact share-capital/share-premium split needs the share issue terms.
Look for these in your work
- Retained earnings rolled forward
- Issue proceeds included once
- Total equity calculated
A director wants to report an unpaid proposed dividend in the statement of changes in equity before the company has declared it. What evidence should determine whether it is recognised at the reporting date?
Give me a hint
Use the reporting framework and timing of the company's present obligation, not the director's intention alone.
Compare my reasoning
- Check the applicable reporting requirements and when the dividend became an authorised obligation.
- Distinguish a proposal made after the reporting date from a distribution approved before it, using the facts and dates given.
- Follow the question's stated treatment and explain whether the amount is recognised, disclosed or absent from the period's equity movement.
A proposal alone does not automatically establish a recognised liability or equity movement. Verify authorisation timing and the applicable requirements, then present or disclose it as instructed.
Look for these in your work
- Applicable rules checked
- Timing checked
- Recognition distinguished from disclosure
Common mistakes
- Recording a bonus issue as new cash or profit
- Deducting dividends from profit or loss instead of equity
What can you explain now?
Where does profit for the year normally appear in the statement of changes in equity?
Compare with the explanation
As an increase in retained earnings
Profit increases retained earnings before distributions and other reserve movements.
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Make it stick
How does a bonus issue affect share capital, reserves, cash and total equity?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.