Statement of owner's equity definition
/What is the Statement of Owner’s Equity?
The statement of owner's equity portrays changes in the capital balance of a business over a reporting period. The concept is usually applied to a sole proprietorship, where income earned during the period is added to the beginning capital balance and owner draws are subtracted. The result is the ending balance in the capital account.
The amount of owner's equity is increased by income and owner contributions. The balance is decreased by losses and owner draws. Thus, the format of the statement of owner's equity may include the following line items:
Beginning capital balance
+ Income earned during the period
- Losses incurred during the period
+ Owner contributions during the period
- Owner draws during the period
= Ending capital balance
How to Prepare a Statement of Owner’s Equity
To prepare a statement of owner's equity, follow these steps:
Start with the beginning capital balance. Begin by recording the owner’s equity balance at the start of the reporting period. This amount can be found in the previous period’s ending balance on the statement of owner’s equity or the balance sheet. For example, if the beginning capital was $50,000, this serves as the starting point for the statement.
Add additional investments by the owner. Include any additional capital that the owner contributed during the period. This could be cash, equipment, or other assets invested to expand the business. For instance, if the owner injected an additional $10,000, it should be added to the beginning capital balance.
Add net income or subtract net loss. Incorporate the net income or net loss reported on the income statement for the same period. If the business earned a net income of $15,000, add this to the capital balance; if it incurred a net loss, subtract it instead. This step shows how profitable operations have increased or decreased owner’s equity.
Subtract owner's withdrawals. Deduct any amounts withdrawn by the owner for personal use, often called drawings or withdrawals. For example, if the owner took $5,000 out of the business, this amount must be subtracted from the capital balance, as it reduces the equity available.
Calculate the ending capital balance. Combine all adjustments to determine the ending capital balance. Using the previous steps:
Beginning capital: $50,000
Additional investment: $10,000
Net income: $15,000
Withdrawals: $5,000
Ending capital balance: $70,000
This figure represents the owner’s equity in the business at the end of the reporting period.
Present the statement clearly. Organize the information in a simple and clear format, listing each step sequentially. Include headings like "Beginning Capital," "Additional Investments," "Net Income," "Withdrawals," and "Ending Capital Balance" to make the statement easy to follow.
Example of a Statement of Owner’s Equity
For example, a business has $100,000 of capital at the beginning of a reporting period. The entity earns $15,000 of income, and the owner withdraws $5,000 from the capital account. The resulting statement of owner's equity reveals the following information:
The report may also be described as the statement of changes in owner's equity.