What does the statement of equity or statement of retained earnings primarily bridge?

The statement of equity, also known as the statement of retained earnings, serves as a crucial financial document that illustrates the changes in equity from one period to the next. The core function of this statement is to bridge the information presented in the income statement and the balance sheet.

When a company earns profits, those earnings increase the retained earnings account within equity on the balance sheet. The statement of retained earnings details how much of the net income (or loss) from the income statement has been retained in the business versus how much has been distributed to shareholders as dividends. Thus, it succinctly links the performance metrics of the company (from the income statement) with the equity section of the balance sheet, providing a clearer picture of how profit generation translates into the company's overall financial health and how it affects the shareholders' equity position.

This connection is vital for stakeholders who want to understand the comprehensive financial implications of a company's operations over a specific period, including how profits are reinvested or distributed.