In this article we will discuss about the transactions and events that change equity.
The transactions and events that influence or do not influence equity have been displayed in the Exhibit 7.1. In this Exhibit class B shows the sources of changes in equity and distinguishes them from each other and from other transactions, events and circumstances affecting an enterprise during a period (classes A and C).
The possible sources of changes in equity can be (1) Comprehensive income (2) all changes in equity from transfers between the enterprise and its owners. Further, comprehensive income is the result of revenues and expenses, gains and losses. The changes in equity due to transfers between the enterprise and its owners may be in the form of investments by owners and distribution to owners.
In the Exhibit class C includes no changes in assets or liabilities. Class A includes all changes in assets and liabilities not accompanied by changes in equity such as exchange of assets for assets, exchange of liabilities for liabilities, acquisitions of assets by incurring liabilities, settlement of liabilities by transferring assets. It means all transactions and events do not affect owners’ equity.
The items covered in Class A, B and C of the Exhibit can be listed as follows:
(A) All changes in assets and liabilities not accompanied by changes in equity. This class comprises four kinds of exchange transactions that are common in most business enterprises.
(1) Exchange of assets for assets, for example, purchase of assets for cash or barter exchanges.
(2) Exchange of liabilities for liabilities, for example, issues of notes payable to settle accounts payable or refunding’s of bonds payable by issuing new bonds to holders that surrender outstanding bonds.
(3) Acquisition of assets by incurring liabilities, for example, purchase of assets on account, borrowings, or receipts of cash advances for goods or services to be provided in the future.
(4) Settlements of liabilities by transferring assets, for example, repayments of borrowings, payments to suppliers on account, payments of accrued wages or salaries or repairs (or payment for repairs) required by warranties.
(B) All changes in assets or liabilities accompanied by changes in equity.
This class comprises:
1. Comprehensive income whose components are:
(a) Revenues and expenses
(b) Gains and losses
2. All changes in equity from transfers between the enterprises and its owners.
(a) Investments by owners in the enterprise,
(b) Distributions by the enterprise to owners.
(c) Changes within equity that do not affect assets or liabilities, for example, share dividends, conversion of preferred shares into common shares and some share recapitalisation. This class contains only changes within equity and does not affect the definition of equity or its amount.