Statement of Owner’s Equity
Every business needs to keep proper financial records to reveal the true state of the business. Business owners and shareholders also need to know the worth of their investment in a company. They can only determine the returns on their investments from a statement of owner’s equity.
If you are not familiar with business terms, you probably wonder; what is a statement of owner’s equity? Don’t worry; in this article, you are going to get all your questions answered about owner’s equity, statement of owner’s equity definition, what it entails, and what it looks like.
What is Owner’s Equity?
Owner’s equity is the rights that a business owner has to the assets of that said business. Simply put, owner’s equity is a value obtained after subtracting liabilities from the total assets of a business. The term owner’s equity is typically used in a sole proprietorship business, as the venture’s assets solely benefit the owner and not stockholders, as in corporations.
Assets entail the total sum of money invested by a business owner plus the business’ profits since inception. Money withdrawn by the business owner and debts owed by the business is then subtracted from the assets to obtain the owner’s equity.
In a company’s balance sheet, owner’s equity is obtained using the equation:
Owner’s Equity = Total Assets- Total Liabilities.
What Does Statement of Owner’s Equity Mean?
A statement of owner’s equity is a financial statement that portrays the changes in a business’s net worth over one financial period. Changes in the capital balance of a sole proprietorship are attributed to the following factors:
- Earning and spending money from the business.
- Appreciation or depreciation of tangible assets.
- Paying taxes.
- Receiving or giving gifts.
- Written-off debts.
The statement of owner’s equity in any business follows a specific format that includes the following items:
Initial capital balance
+Total income earned during the financial year
-Losses incurred during the year
+Business owner contribution during the financial year
-Money drawn by the owner during the year
= Closing capital balance
What Can You Learn from a Statement of Owner’s Equity?
A statement of owner’s equity is an important element of a business’s financial statement that is often underrated. Underestimating the importance of the statement is not wise, as the business owner will not monitor change in the total net worth of that enterprise. A shift in the total net worth is detected by adding changes in the capital contributed, market valuation, and changes in retained earnings. The value obtained can reflect whether the net worth increased or not over the financial year and by what amount.
As a business owner, you learn the various factors that can increase or reduce your net worth every financial period. The factors include:
- The money you have earned from the business.
- The amounts that you have withdrawn from the company for other uses.
- The taxes you have paid.
Other elements that affect your owner’s equity include gifts received or given and inflation or deflation of the assets in your possession. Without learning how to prepare a statement of owner’s equity, you will not evaluate your total net worth effectively.
Statement of Owner’s Equity in Small and Mid-sized Firms
In small and mid-sized firms, owner’s equity is referred to as stockholder equity. Stockholder equity shows changes in the various equity accounts of a firm during a financial year. The various accounts in a statement of owner’s equity include:
- Common stock
- Preferred stock
- Additional paid-in capital
- Retained earnings
- Treasury stock
- Accumulated other comprehensive income.
Most small and mid-sized firms prefer to make a separate statement of owner’s equity from the business’s balance sheet. The statements detail each equity account separately and also show the changes that have been associated with them. The statements include a beginning balance and highlight the changes that added or subtracted the business’s net worth to reveal an ending balance of a financial year. The ending balance in the current year becomes the beginning balance in the following financial year’s statement of owner’s equity. Businesses that just started do not have a beginning balance until the completion of the first financial year.
Example of a Statement of Owner’s Equity
A statement of owner’s equity is derived from a balance sheet. Closing balances at the end of a financial year should match the balance sheet and the statement of owner’s equity. Here is an example of a balance sheet of Uncle Tim’s restaurant to show you how the owner’s equity is derived.
| ASSETS | |
| Current Assets | |
| Cash in bank | $10,000 |
| Accounts receivable | $2,000 |
| Inventory | $40,000 |
| Total current assets | $52,000 |
| Fixed Assets | |
| Computers | $1,500 |
| Fixtures | $35,000 |
| Delivery van | $20,000 |
| Total fixed assets | $71,500 |
| Total Assets | $123,500 |
| LIABILITIES | |
| Current Liabilities | |
| Accounts payable | $3,500 |
| Accrued expenses | $8,000 |
| Total current Liabilities | $11,500 |
| Long term liabilities | $102,000 |
| Bank loan | $10,000 |
| Total Liabilities | $21,500 |
| OWNER’S EQUITY | |
| Owner contribution | $10,000 |
| Owner draws | ($70,000) |
| Current year earnings | $162,000 |
| Total Liabilities and Owner’s Equity | $123,500 |
As you can see from the balance sheet above, Uncle Tim’s owner’s equity is $102,000. This value can be obtained in two ways:
| Total assets at Uncle Tim’s Restaurant | = $123,500 |
| – | |
| Total liabilities | =$21,500 |
| Owner’s Equity | =$ 102,000 |
OR;
| Owner contribution | = $10,000 |
| + | |
| Current year earnings | = $162,000 |
| – | |
| Owner draws | = $70,000 |
| Owner’s Equity | =$ 102,000 |
From the above balance sheet, you can easily draft your business’ statement of owner’s equity. If that proves to be quite a hassle for you, or you don’t have time, you can download a statement of owner’s equity template from the internet. The template will help you fill in the required details and derive your owner’s equity value quickly. Now, onto Uncle Tim’s Restaurant Statement of owner’s equity. Ideally, it should look like this:
| Owner’s equity at 1st January 2021 | *** |
| Owner’s capital contribution | $10,000 | Net income | $162,000 |
| Subtotal | $172,000 |
| Deduct: | |
| Owner’s draws | $70,000 |
| Owner’s Equity at 31st December 2021 | =$102,000 |
A statement of owner’s equity reflects the ability of the business to grow and become successful. If the owner’s equity keeps increasing every year, it indicates that the business is doing well. However, the increasing owner’s equity should only be attributed to increased net profits rather than increased owner’s contribution.
Conclusion
A statement of owner’s equity is a financial statement used to indicate a business owner’s claim to the assets of a business. The value of the owner’s equity is derived from deducting the total liabilities of a business from the total assets. Also, businesses can obtain this value by deducting the owner’s draws from the net income and owner’s contribution to a business.
Ideally, the closing balances on a business’s balance sheet and the statement of owner’s equity should match. If you are struggling with determining your owner’s equity, use the above statement of owner’s equity example to guide you in preparing your own statement.
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