The Statement of Changes in Equity is one of the key financial statements that provides details about how an organization's equity has evolved over a reporting period. It explains the starting balance of equity, the changes caused by different elements such as profits or losses from operations, issuance or purchase of capital, and dividend payments to shareholders, and finally, the closing balance of equity. This statement is crucial as it connects the income statement and balance sheet by showing the bridge between net income reported in the income statement and equity reported in the balance sheet. An example of how this may be used is in explaining an increase in equity due to retained earnings after a profitable year.
For instance, a company may start with a total equity of $500,000 at the beginning of the financial year. If it reports a net income of $200,000, issues new shares amounting to $50,000, and pays out dividends totaling $30,000 during the year, the Statement of Changes in Equity would explain that these are the transactions resulting in the ending equity of $720,000. Thus, it allows stakeholders to understand the detail behind the numbers reflected in equity at the beginning and end of the period.