Updated July 14, 2023
Definition of Statement of Owner’s Equity
A Statement of owner’s equity is defined as a type of financial statement that is prepared to record any kind of changes which is taking place in the equity portion part of the balance sheet of a company on a specific accounting period, i.e., In layman’s terms, the statement of owner’s equity records the increase or decrease in the amount of shareholder’s equity over some time, typically considered as one accounting year.
Explanation of Statement of Owner’s Equity
As discussed above, we have given a slight background to a statement of owner’s equity. We found out it is the change to the amount of the equity portion of a company’s balance sheet, which can be either an increase or a decrease over a period of time which is generally an accounting period. The statement of owner’s equity is the shortest financial statement because there aren’t many accounting entries that will affect the value of the owner’s equity or the associated equity account. It will list down the net income for the period or the loss for the period, along with the owner’s contribution or any kind of withdrawals made during the period.
The report starts off with the “opening equity balance”. It adds the net income and contributions made by the owners while deducting the net loss and withdrawals made by the owners to arrive at the “closing equity balance”. The closing balance is always a carry-forward balance for the next accounting period and becomes the opening balance for the following year. When a new business starts, it obviously won’t have an opening balance during its inception stage.
A typical statement of owner’s equity will start with a heading comprising three lines where the first line will demonstrate the company’s name, and the second line will tell us about the report’s title. Lastly, we will have the details about the period covered. The title of the reports tells a lot about the nature of the business; for example, the statement of owner’s equity will be the title for sole proprietorships, the statement of partners will be the title for partnership firms, and the statement of stockholder’s equity will be the title for corporations. The capital account used differs from company to company.
Good accounting practice suggests that every time an amount is computed, a single straight line should be drawn, which signifies that a mathematical operation has ended or a total has been calculated. A double line indicates the final total amount. Income tends to increase capital, whereas expenses will bring it down. Net income, a component of owner’s equity, is the difference between income and expenses. Thus, it means the net income will tend to increase the owner’s equity component of the balance sheet. In contrast, a net loss will reduce the owner’s equity as the capital level declines when the business suffers losses.
Examples of Statement of Owner’s Equity
Here we will be discussing on few examples to demonstrate the concept of owner’s equity. Let us take a detailed set of two for the same. We have attached the referenced examples in the Excel sheet attached to this file, and in total, there are two examples in two different tabs.
To start off with, let us take example 1:
In example 1 of the attached Excel sheet Tab1, we have taken a very basic balance sheet of a company to compare the asset and liabilities and match the same where, according to the accounting equation, assets equal to shareholder’s equity plus the liabilities. The company has current assets worth $20,000 and long-term fixed assets worth $105,00. The other assets computed are to an amount of $1000. So, on adding all the assets, we arrive at a total number of $126,000. Now let us focus on the liabilities and the owner’s equity part. The company has current liabilities of $56,000 and long-term liabilities of $30,000. Thus, this makes the company’s total liabilities stand at $86,000. Focusing on the shareholder’s equity portion, we see that the owner’s contributed capital is $20,000, and the retained earnings for the business stand at another $20,000. So, the total owner’s equity stands at $40,000. Thus, if we add the total liabilities and owner’s equity part, we get a total value of $126,000. This balances the accounting equation where total assets equal the sum of liabilities and the owner’s contributed equity.
In example 2, we see a typical owner’s equity calculation for a business and what makes up the owner’s equity. Also, how the opening and closing balances are computed is shown here. To start off, we see the business begins a new accounting period with an opening balance of $50,000, and the investments made during the year earn an additional $10,000. Also, the net income for the period stands to be $15,000. Thus, we have a subtotal of $75,000, but this is not the end. The owner has also withdrawn a certain amount from the contributed capital to $5,000, and the business has made some minor losses of another $5,000 in a few departments. To arrive at the closing balance of the owner’s equity, we need to take all the above numbers into accountability from the subtotal mentioned above; we deduct the withdrawals and the losses to arrive at the closing balance of the owner’s equity, i.e., $65,000. This again gets carried forward to the next year as the opening balance of the following year.
Thus, here in this article, we have discussed the detailed meaning of owner’s equity and how it is computed to arrive at the final number. Also, with the help of examples, we found how companies calculate this component and show the same in their balance sheet.
This is a guide to the Statement of Owner’s Equity. Here we also discuss the definition and examples of a statement of owner’s equity, along with an explanation. You may also have a look at the following articles to learn more –