Statement of Owners' Equity (Statement of Retained Earnings)

The equity statement explains the changes in retained earnings.

Retained earnings appear on the balance sheet and most commonly are influenced by income and dividends.  The Statement of Retained Earnings therefore uses information from the Income Statement and provides information to the Balance Sheet.

The following equation describes the equity statement for a sole proprietorship:

Beginning Equity
+ Investments
- Withdrawals
+ Income
----------------
= Ending Equity

For a corporation, substitute "Dividends Paid" for "Withdrawals".  The stockholders' equity in a corporation is  calculated as follows:

Common Stock (recorded at par value)
+ Premium on Common Stock (issue price minus par value)
+ Preferred Stock (recorded at par value)
+ Premium on Preferred Stock (issue price minus par value)
+ Retained Earnings
------------------------------------------------------------
= Stockholders' Equity


Note that the premium on the issuance of stock is based on the price at which the corporation actually sold the stock on the market.  Afterwards, market trading does not affect this part of the equity calculation.  Stockholders' equity does not change when the stock price changes!