Statement of Owner’s Equity Explained

Many different financial statements are produced for businesses to gauge the financial position of a business, showcasing the financial results e.g. Statement of Financial Position, Comprehensive Income Statement, Statement Cash Flows and Statement of Changes in Equity or Owner’s Equity Statement.

The Owner’s Equity Statement shows the changes in capital/equity in a business overtime and includes account headings like initial capital, income or loss for the year or accounting period, additional investment by the owner and finally the drawings by the business owner.

A standard owner’s equity statement looks like the following:

ABC Ltd.

Owner’s Equity Statement

For the year ended 31-12-2016

 

Description Amount $
Opening Capital as on 01-01–2016 xxx
Add: Income for the Year 2016 xxx
Less: Loss for the Year 2016 (xxx)
Add: Additional Capital Invested xxx
Less: Drawings by the owner (xxx)
Closing Equity as on 31-12-2016 xxx

 

It should be further explained that the income or loss for the year is labelled as ‘net income’ which can be either profit which should be added or loss which should be deducted. Refer to below for more explanations of how the Owner’s Equity statement is used.

Example 1:

ABC Enterprises started business on 1st June 2017 with its financial year ending on 31st May 2017. John, being the sole proprietor of the business, injected capital of $100,000. During the year ABC Enterprises reported a net income of $5,000 Owing to some personal emergencies, John took $1,000 from the business account on 3 different occasions during the year. Based on the information provided, prepare ABC Enterprises’ Owner’ Equity Statement at the financial year end.

Solution:

ABC Enterprises

Owner’s Equity Statement

For the year ended 31st May 2017

Description Amount $
Opening Capital as on 01-06—2016 100,000.00
Add/(Less): Net Income for the Year 2016 5,000.00
Add: Additional Capital Invested 0.00
Less: Drawings by the owner (3,000.00)
Closing Equity as on 31-12-2016 102,000.00

 
Example 2:

Alpha Ltd. provides consumable tools and equipment to security agencies. The entity was setup by Michael, a retired marine officer. On 1st Jan 2017, at the time of its incorporation, a sum of $35,000 was injected in the business. Unable to secure profitable contracts and with increasing operating costs, Michael took out a personal loan of USD $50,000 and made a further investment of $35,000 in Alpha Ltd. At the end of the financial year the income statement of the business showed a net income of USD -$20,000.

Prepare the Owner’s Equity Statement reflecting the events stated above.

Solution:

Alpha Ltd.

Owner’s Equity Statement

For the year ended 31st Dec, 2016

Description Amount $
Opening Capital as on 01-06-2016 35,000.00
Add/(Less): Net Income for the Year 2016 (20,000.00)
Add: Additional Capital Invested during the year 35,000.00
Less: Drawings by the owner (0.00)
Closing Equity as on 31-12-2016 102,000.00

 

As we can see from the examples above, the Owner’s Equity statement shows the owner’s investment in a business after taking into account the profits, losses, additional investment and drawings.

 

Operational Income results in an increased equity and operational loss decreases the equity. Likewise, additional capital investment increases the equity and drawings result in deduction.

 

Although known by many names, when prepared for partnerships, this statement is called ‘Statement of Changes in Partner’s Equity’ and for shareholders it is usually termed as ‘Statement of Changes in Stockholders’ Equity’.

 

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