06 Apr What is Statement of Owner’s Equity?
The statement of owner’s equity provides details about the changes in the capital of a sole proprietorship over a certain period. It tells you the opening balance of the owner’s equity, the reasons for increases and decreases during the period, and the closing balance.
What does statement of owner’s equity mean?
Remember that this term is usually used for sole proprietorships and not for partnership firms or for corporations.
During a certain period, say a year, the owner’s capital could undergo a change due to several factors. The capital will increase because of:
- Additional contributions made by the owner. (1)
- The net income earned by the sole proprietorship. (2)
There could also be certain factors that lead to a decrease in capital. These are:
- Withdrawals made by the owner. (3)
- Losses incurred by the sole proprietorship. (4)*
*Obviously, the sole proprietorship cannot have net income [(2) above] and a loss (4) in the same period. Only one of these would appear in the statement of owner’s equity
Example of statement of owner’s equity
Consider a sole proprietorship named Grenshaw Manufacturing. Its statement of owner’s equity for the year 2017, could read like this:
Statement of Owner’s Equity
For the Year Ended December 31, 2017
Grenshaw, Capital on January 1, 2017 $ 75,000
Add: Contribution made during the year $ 15,000
Net income earned during the year $ 7,500
TOTAL $ 97,500
Less: Withdrawals made during the year $ 17,500
Grenshaw, Capital on December 31, 2017 $ 80,000
The statement shows that the sole proprietorship started with a capital of $75,000 on January 1, 2017. During the year, the proprietor contributed additional capital of $15,000. This resulted in an increase in the company’s capital.
Grenshaw Manufacturing earned a net income of $7,500 in 2017. This also served to increase the sole proprietorship’s capital. The withdrawals of $17,500 during the year resulted in a decrease in Grenshaw Manufacturing’s capital.
The net effect of these changes was that the capital stood at $80,000 at the end of 2017.
During any period, it is usual for the owner’s capital to undergo a change. The statement of owner’s equity serves to explain the factors that have led to this change.
It is a critical report that lets the sole proprietor of a business know the capital balance at the beginning of the period under review and the reasons for the changes in this balance in the review period.