The statement of stockholders' equity (also called the statement of changes in equity or shareholders' equity) shows how each component of equity moved from the beginning of the period to the end. Equity is the residual of the balance sheet, so every movement has a source: earnings, owner transactions, stock compensation or other comprehensive income. An equity rollforward that ties out is one of the quickest checks on whether the books are complete.
This guide covers the components, the required disclosure, a worked example with arithmetic, the audit procedures and the usual errors. The equity rollforward template provides the layout.
What the statement must show
ASC 505-10-50-2 requires an entity that presents both a balance sheet and an income statement to disclose changes in the separate accounts that make up stockholders' equity, and changes in the number of shares of equity securities, for at least the most recent annual period and any later interim period presented. Most entities meet it with a statement of changes in equity. Disclosure in the notes is also permitted. Entities with noncontrolling interests show those changes too, and SEC registrants have additional requirements under Regulation S-X.
Components of equity
| Component | What moves it |
|---|---|
| Common stock (par) | Issuance of shares at par; retirements |
| Additional paid-in capital | Issuance above par; stock compensation expense; option exercises |
| Retained earnings | Net income or loss; dividends; prior period adjustments |
| Accumulated other comprehensive income | Unrealized gains and losses on certain items, such as foreign currency translation |
| Treasury stock | Repurchases (cost method shown as a deduction); reissuance |
| Noncontrolling interest | Share of subsidiary income and distributions |
For limited liability companies and partnerships, the components are members' or partners' capital accounts, with contributions, distributions and allocations of income. The rollforward logic is the same.
The rollforward
For each component: beginning balance + additions - reductions = ending balance. For total equity:
Ending equity = beginning equity + net income + other comprehensive income + stock issued + stock compensation - dividends - repurchases.
Beginning balances must agree to the prior year's audited or reviewed ending balances. A difference is an opening balance problem, which could be a prior period adjustment, a restatement or an error. See restatement vs revision and first-year audits and opening balances.
Worked example
All figures are illustrative. A corporation has common stock with par value $0.01.
Beginning balances: 1,000,000 shares issued, no treasury shares.
| Component | Beginning |
|---|---|
| Common stock (1,000,000 x $0.01) | 10,000 |
| Additional paid-in capital | 190,000 |
| Retained earnings | 530,000 |
| Treasury stock | 0 |
| Total equity | 730,000 |
Events during the year:
- Net income of 140,000.
- Cash dividends of 30,000.
- Stock compensation expense of 12,000.
- Issued 20,000 shares at $5.00, proceeds 100,000. Par is 20,000 x $0.01 = 200; the rest, 99,800, goes to paid-in capital.
- Repurchased 5,000 shares at $6.00 for 30,000, recorded at cost as treasury stock.
| Component | Beginning | Change | Ending |
|---|---|---|---|
| Common stock | 10,000 | +200 | 10,200 |
| Additional paid-in capital | 190,000 | +99,800 +12,000 | 301,800 |
| Retained earnings | 530,000 | +140,000 -30,000 | 640,000 |
| Treasury stock | 0 | -30,000 | (30,000) |
| Total | 730,000 | +192,000 | 922,000 |
Check by components: 10,200 + 301,800 + 640,000 - 30,000 = 922,000. Check by activity: 730,000 + 140,000 - 30,000 + 12,000 + 100,000 - 30,000 = 922,000. Change: 140,000 - 30,000 + 12,000 + 100,000 - 30,000 = 192,000.
Share counts: issued 1,000,000 + 20,000 = 1,020,000. Treasury 5,000. Outstanding 1,015,000.
The journal entry for the issuance debits cash 100,000 and credits common stock 200 and additional paid-in capital 99,800. Stock compensation debits compensation expense and credits additional paid-in capital for 12,000. The debit is already inside the 140,000 of net income, so the 12,000 credit is a separate addition to paid-in capital in the rollforward and total equity is not double counted.
Audit procedures
- Opening balances. Agree each component to the prior-year audited balances and the prior statement.
- Net income and other comprehensive income. Agree to the income statement and statement of comprehensive income.
- Dividends and distributions. Agree to board minutes or member approvals, the cash disbursement and legal limits such as loan covenants and state law.
- Stock issuances. Agree to the subscription or purchase agreements, the cash receipt, and the stock ledger or cap table. Check the par and paid-in capital split.
- Shares. Agree issued, outstanding and treasury shares to the stock ledger, transfer agent records or cap table. Confirm authorized shares are not exceeded, using the articles of incorporation.
- Treasury stock. Agree repurchases to agreements and payments, and check the method (cost or par value) is applied consistently.
- Stock compensation. Agree expense to the award schedule and fair value support. See ASC 718 for private companies.
- Classification. Consider whether instruments issued as equity should be liabilities, such as mandatorily redeemable shares. See liability vs equity classification.
- Related parties. Look at transactions with owners that bypass the equity accounts, such as owner expenses recorded as business expenses. See related-party transactions.
- Disclosures. Share counts, par values, authorized shares, preferences, dividends in arrears, restrictions on dividends, and subsequent events.
Common errors
- Dividends booked to expense or to receivables instead of retained earnings.
- Owner draws or distributions in an S corporation recorded as loans without terms.
- Beginning retained earnings that do not agree to the prior year after "cleanup" entries.
- Stock issued below fair value with no stock compensation recognized.
- Share counts in the notes that disagree with the stock ledger.
- Treasury stock netted into common stock or retained earnings without disclosure.
- Equity classified for an instrument that has liability features.
FAQ
Is a statement of stockholders' equity required?
Under ASC 505-10-50-2, changes in equity accounts and share counts must be disclosed, either in a separate statement or in the notes. Most entities present the statement.
What is the formula for ending equity?
Beginning equity plus net income, other comprehensive income, stock issued and stock compensation, less dividends and repurchases.
How do treasury shares affect equity?
Under the cost method, they reduce total equity by the cost of the shares and are shown as a deduction.
What is the difference between additional paid-in capital and common stock?
Common stock is recorded at par value. The amount received above par is additional paid-in capital.
What do auditors compare to the equity statement?
The prior-year audited balances, the income statement, board minutes, the stock ledger, cash records and legal documents.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- FASB ASC 505-10-50-2, Equity, disclosure of changes in equity accounts and shares; KPMG, Financial statement presentation handbook (2026), section 2.3 and Debt and equity financing handbook (2025)
- FASB ASC 718, Compensation, Stock Compensation; ASC 480, Distinguishing Liabilities from Equity
- SEC, Regulation S-X, 17 CFR 210.3-04, changes in stockholders' equity, eCFR
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error