When preparing the statement of owners equity, the beginning capital balance can always be found

Owner's Equity Statements: Definition, Analysis and How to Create One

By Autumn Banks, TD In-Store Small Business Lead
Monté Foster, SVP, Retail and Small Business Banking

In simple terms, you can calculate owner's equity for your business by subtracting all your business liabilities from the value of all your business assets. When your business makes a profit, owner's equity is positive. When your business takes a loss, owner's equity is negative.

What is an owner's equity statement and what business types use one?

A statement of owner's equity is a one-page report showing the difference between total assets and total liabilities, resulting in the overall value of owner's equity.

Tracked over a specific timeframe or accounting period, the snapshot shows the movement of cashflow through a business. The owner's equity statement is one of four key financial statements and is usually the second statement to be generated after a company's income statement.

Sole proprietorships, partnerships, privately held companies and LLCs typically use the owner's equity statement – also known as statement in changes in owner's equity or statement of retained earnings. Corporations use a shareholder's or stockholder's equity statement, which are more complex and involve dividends and stock components.

What is the purpose of an owner's equity statement?

This important business tool determines overall financial health and stability of your business. The equity statement indicates if a small business owner needs to invest more capital to cover shortfalls, or if they can draw more profits.

Small business owners utilize this data when making business decisions, such as expansion and diversification. Positive equity is an indicator of financial soundness and the ability to cover liabilities. Negative equity could indicate potential bankruptcy or inability to cover costs and expenses. For example, if a business is unable to show its ability to financially support itself without capital contributions from the owner, creditors could reconsider lending the business money.

How is an owner's equity statement created?

First, create the statement heading
The heading of the statement consists of three lines:

1. Name of the company
2. Title of the statement
   Sole proprietors would title the report as an Owner's Equity Statement, partnerships as Partner's Equity Statement and a corporation as Shareholder's Equity Statement
3. Period being reported

Business ABC
Owner's Equity Statement
Period ending December 31, 2020

Statement of Owner's Equity

A Statement of Owner's Equity is a financial statement that presents a summary of the changes in the shareholders’ equity accounts over a given period.

Purpose & Importance

While the ending balances of owner's equity are mentioned in the Balance Sheet, it is often tough to ascertain what caused the changes in the owner's accounts, especially in bigger corporations.

The Statement of Owner's Equity helps users of financial statements to identify the factors that caused a change in the owners' equity over the accounting period.

The Statement of changes in equity discloses significant information about equity that is not presented separately elsewhere in the financial statements and is useful to external users in understanding the nature of changes in the equity accounts.

How does it work?

Owner's Equity begins when capital is invested in the business by the owners and thereafter increased (or decreases) as profits (or losses) are made in the business.

The theory behind the Statement of Owners Equity is to reconcile the opening balances of equity accounts in a company with the closing balances and present this information to external users.

Broadly, the two major types of changes that effect the Statement of Owners Equity are-

(1) changes that originate from transactions with the owners (shareholders) such as issue of new shares, payment of dividends, etc. and

(2) changes that result from changes in net income for the period, total comprehensive income, revaluation of fixed assets, changes in fair value of available for sale investments, etc.

The Statement of Owner's Equity looks very different in Small and Mid Size Firms vs. Big Conglomerates.

Lets go through each one.

Statement of Owner's Equity in Small and Mid Size Firms

The Changes in Owner's Equity in smaller organizations can be rather simple and straightforward.

They increase by Owner contributions and Company Profits.

They decrease by Owner Withdrawals, Dividend Distributions or Company Losses.

The Statement of Owners Equity follows a simple formula -

Beginning capital balance

Add: Any Additional Owner Contributions into the Business

Add: Net Income made by the Business

Less: Any Withdrawals taken by the Owners

Less: Losses made by the Business

= Ending capital balance

Often times, many small and mid sized firms may even choose not to include a Statement of Owner's Equity.

In such cases, the reader of the Financial Statement can ascertain the changes to the equity accounts from the company profit (or loss) which can be seen in the Income Statement and any Ownership Contributions or Cash Dividends which is located in the Cash Flow from Financing Activities in the Statement of Cash Flows.

Statement of Owners Equity in Larger Corporations

A Corporation issues ownership shares called Capital Stock - so it is common to see the Statement or Owners Equity be referred to as Statement of changes in Stockholder's Equity in bigger Corporations.

Accounting Speak!

The many names of Owner's Equity

The Statement of Owners Equity is ALSO referred to as the Statement of Retained Earnings!

An Example of the Statement of shareholders equity can be seen below

This is the Statement of Shareholders Equity for Walmart Inc. for financial year ended 31 January 2017. 

As seen above, The Statement of shareholders equity is normally prepared in vertical format, i.e. the equity components appear as column headings and changes during the year appear as row headings.

Typical Components 

Typically, a statement of shareholders equity summarizes changes in the following equity components:

Technical Stuff

Certain types of Gains and Losses are recorded directly in the stockholders equity accounts instead of going through the income statement.

This is a rather sneaky way of by passing the income statement.

In this way, gains and losses do not effect the bottom line profit of a business that is reported in the Income Statement.

Conclusion

The Professionals - stock analysts, money and investment managers and so on carefully read through and dissect the statement of Owner's Equity (or at least they should!) .

But, for people new to the accounting world, reading the Statement of Changes in Stockholders Equity in an Annual Financial Report for a Corporation can be heavy lifting.

Our advise is start with an understanding of the major items and slowly build from there.

Final Thoughts

If you are new to accounting the next thing I would read about would be the Balance Sheet and The Cash Flow Statement.

If you want to learn accounting with a dash of humor and fun, check out our video course.

Disclaimer

The content provided on accountingsuperpowers.com and accompanying courses is intended for educational and informational purposes only to help business owners understand general accounting issues. The content is not intended as advice for a specific accounting situation or as a substitute for professional advice from a licensed CPA. Accounting practices, tax laws, and regulations vary from jurisdiction to jurisdiction, so speak with a local accounting professional regarding your business. Reliance on any information provided on this site or courses is solely at your own risk.

Tax and accounting rules and information change regularly. Therefore, the information available via this website and courses should not be considered current, complete or exhaustive, nor should you rely on such information for a particular course of conduct for an accounting or tax scenario. While the concepts discussed herein are intended to help business owners understand general accounting concepts, always speak with a CPA regarding your particular financial situation. The answer to certain tax and accounting issues is often highly dependent on the fact situation presented and your overall financial status.

When preparing a statement of owners equity the beginning capital balance can always be found?

What is the starting balance on the statement of owner's equity?

Where can you find the owner's equity capital balance at the beginning of a period?

Where is beginning balance found?