A statement of owner’s equity is one of the four major business financial statements. It is also known as a statement of changes in equity and it is used to show how the equity in a business has changed over a certain period of time.
Why a Statement of Owner’s Equity is Important
Owner’s equity is the value of an owner’s stake in their business. The document provides insights into the financial health of the business and shows whether the business is capable of meeting ongoing financial and operating obligations without requiring additional capital from its owners. It is often used by potential and current investors, lenders and creditors to assess the business’s financial stability. It can also be an important document for tax planning and reporting, especially for businesses that are taxed based on the owner’s personal income.
Key Elements of a Statement of Owner’s Equity
A statement of owners’ equity is used to show a business’s retained earnings, or rather the profits that are kept by the business rather than distributed to owners or shareholders during an accounting period. Key elements include:
- Beginning equity balance
- Owner investments and contributed capital
- Net income or loss for the period
- Owner’s withdrawals or distributions to owners
- Ending equity balance
How to Calculate Owner’s Equity
The following steps will guide you through preparing and formatting a statement of owner’s equity.
Step 1: Gather Your Financial Data
Start by collecting and verifying the financial data you’ll need to create your statement of owner’s equity. This will include the total value of your business’ assets and the total value of its liabilities. Total assets include everything the business owns, such as cash, accounts receivable, inventory, equipment, and real estate. Total liabilities include all the money the business owes to others, such as loans, accounts payable, and salaries owed. It helps if you prepare this statement after you’ve prepared your income statement.
Step 2: Format Your Document & Choose Your Reporting Period
Title your document “Statement of Owner’s Equity” and include the name of your business and the period covered by the statement in your heading.
Step 3: Beginning Owner’s Equity
Report the capital balance at the beginning of the reporting period. This figure is the ending owner’s equity from the previous accounting period. It can be calculated by subtracting total liabilities from total assets. Here is the formula:
Owner’s Equity = Total Assets – Total Liabilities
Step 4: Calculate Additions to Equity
Contributed capital and net income increases owner capital and should be added to the capital balance. List and add any investments or additional capital the owner contributed as well as the net income from the income statement. If the business has a loss for the reporting period, it will be negative and decrease the owner’s equity.
Step 5: Calculate Deductions from Equity
Withdrawals made by the owner or any distributions the owner made decrease capital and should be listed and subtracted from the owner’s equity.
Step 6: Ending Owner’s Equity
Calculate the ending owner’s equity by adding contributions and net income to the beginning equity, then subtracting withdrawals and losses. Here is the formula:
Beginning Equity + (Contributed Capital + Net Income) – (Losses + Withdrawals) = Ending Equity
Get Accounting Help for Your Business
There’s a lot of value to be found in your owner’s equity statement. If you’d like help preparing or interpreting any of your financial statements, reach out to Arsenault CPA Firm today. We are a licensed accounting firm based out of Gallup, New Mexico and provide businesses of all sizes with high-quality professional accounting including monthly financial statements, bookkeeping, tax strategies, financial management solutions and more. Spend less time managing your finances and more time growing your business with Arsenault CPA Firm. Contact us today for a free consultation.