This lesson presents the Statement of Owner's Equity (or Statement of Changes in Owner's Equity) along with important points you need to know in preparing and understanding this report.
In a Nutshell
A Statement of Owner's Equity shows the changes in the capital account of a sole proprietorship. These changes arise from contributions, withdrawals, and net income or net loss.
We'll go through a sample and discuss important details about this financial statement.
Components of Capital or Equity
Capital is increased by owner contributions and income, and decreased by withdrawals and expenses.
The Statement of Owner's Equity, which is prepared for the sole proprietorship type of business, shows the movement in capital as a result of those four elements.
Statement of Owner's Equity Example
Here is a sample Statement of Owner's Equity of a service type sole proprietorship business, Carter Printing Services. All amounts are assumed and simplified for illustration purposes.
Assume that the company started the year 2020 with $100,000 capital. During the year, the owner made $10,000 additional contributions and $20,000 total withdrawals. The Statement of Owner's Equity would look like this:
|Carter Printing Services
|Statement of Owner's Equity
|For the Year Ended December 31, 2020
|Carter, Capital – beginning
|Less: Carter, Drawings
|Carter, Capital – ending
Explanation and Pointers
- A Statement of Owner's Equity (SOE) shows the owner's capital at the start of the period, the changes that affect capital, and the resulting capital at the end of the period. It is also known as "Statement of Changes in Owner's Equity".
- A typical SOE starts with a heading which consists of three lines. The first line shows the name of the company; second the title of the report; and third the period covered.
- The title of the report is Statement of Owner's Equity. This is used for sole proprietorships. For partnerships, the title used is "Statement of Partners' Equity" and for corporations, "Statement of Stockholders' Equity".
- Notice that the third line is worded "For the Year Ended..." This means that the SOE presents information for a specific span of time. In the above example, the period covers 1 year that ends on December 31, 2020. Hence, the amounts presented pertain to changes to owner's equity from January 1, 2020 to December 31, 2020.
- The capital account used in the illustration is Carter, Capital. The capital account used would vary from company to company.
- Income increases capital. Expenses decrease it. Net income is equal to income minus expenses. Hence, net income would increase the capital account. If expenses exceed income, there is a net loss. In such case, net loss will decrease the capital account.
- Notice that the net income above, $ 57,100, is the bottom-line amount in the company's Income Statement.
- Carter, Drawings represents the total withdrawals made by the owner during the period. The owner made $ 20,000 total drawings. This amount is deducted to get the capital balance.
- The Statement of Owner's Equity example above shows that the company has $147,100 in capital as a result of the following: $100,000 balance at the beginning of the year, plus $10,000 owner's contributions during the year, plus $57,100 net income, and minus $20,000 withdrawals.
- Good accounting form suggests that a single line is drawn every time an amount is computed (it signifies that a mathematical operation has been completed). The bottom-line amount is double-ruled, i.e. $ 147,100.