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The Regulatory Framework of Financial Reporting

Statement of changes in capital

Notice in the previous example that the capital of the business entity has increased
by $1,000 – the amount of net profit retained in the entity. It is possible to prepare a
statement of changes in capital, showing exactly how the figure of $65,000 has risen
to $66,000.

Illustration 1

Statement of changes in capital
$ $
Capital at start of the month
Net profit earned in period
Less: profit withdrawn by Nadim

––––––
Net profit retained in the business entity
––––––
Capital at end of month
Receivables ––––––
You should see clearly from this statement how the statement of profit or loss
links up with the statement of financial position: the net profit earned, shown in
the statement of profit or loss, becomes an addition to capital in the statement
of financial position, and Nadim’s drawings are deducted from this.

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