Definition of Statement of Owner’s Equity
Statement of owner’s equity is defined as a type of financial statement which 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 lay man’s word statement of owner’s equity will be recording the increase or decrease of the shareholder’s equity amount over a period of time which is generally considered to be one accounting year.
Explanation of Statement of Owner’s Equity
As discussed above, we have given a slight background to what a statement of owner’s equity is all about where we found out it is basically 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 defined as the shortest financial statement because not a lot of accounting entries will impact the value of the owner’s equity or the equity account connected to it. It will basically list down the net income for the period or the loss for the period along with the contribution of the owner or any kind of withdrawals made by them during the period.
The report starts off with the “opening equity balance” and adds the net income and contributions made by the owners whereas deducts the net loss and withdrawals made 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 has been started, it is obvious that it won’t have an opening balance right during its inception stage.
A typical statement of owner’s equity will start with a heading which will comprise of three lines where the first line will demonstrate the company’s name, the second line will tell us about the title of the report, and 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, statement of owner’s equity will be the title for sole proprietorships, statement of partners will be the title for partnership firms, and 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 will generally tend to increase the capital, whereas expenses will bring it down. Net income, which is a component of owner’s equity, is the difference between income and the expenses. Thus, it means the net income will tend to increase the owner’s equity component of the balance sheet, whereas a net loss will reduce the owner’s equity as 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 with this file, and in total, there are two examples in two different tabs.
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To start off with, let us take example 1:
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 matching the same where according to the accounting equation, assets equal to shareholder’s equity plus the liabilities. Here for the company, we find that it 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 the total number of $126,000. Now let us focus on the liabilities and the owner’s equity part. We find the company has current liabilities to a tune of $56,000 and long-term liabilities to an amount of $30,000. Thus, this makes the total liabilities stand at $86,000 for the company. Now, 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 stands 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 the total value of $126,000, which makes the accounting equation balance for us where total assets equal to the sum of liabilities and the owner’s contributed equity.
Example #2
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 balance and closing balance are computed are 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 earns 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 the extent of $5,000, and the business has made some minor losses of another $5,000 in few departments. To arrive at the closing balance of the owner’s equity, we need to take all the numbers mentioned above into accountability were 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.
Conclusion
Thus, here in this article, we have discussed about 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 it how companies calculate this component and show the same in their balance sheet.
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