What is a Statement of Owner’s Equity?

Statement of Owner’s Equity

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Statement of Owner’s Equity

A Statement of Owner’s Equity, sometimes referred to as the “Statement of Changes in Equity” or “Equity Statement,” is one of the core financial statements used by businesses, particularly in the context of sole proprietorships, partnerships, and some small corporations. This statement provides a summary of the changes in an owner’s or owners’ equity in a business over a specific period of time.

The Statement of Owner’s Equity typically shows:

  • Beginning Equity: This is the amount of owner’s equity at the start of the period, which would be the end balance from the previous period.
  • Capital Contributions (or Additional Investment): The amount the owner or owners have invested in the business during the period.
  • Net Income (or Net Loss): This is taken from the income statement for the period. If the business is profitable, it increases owner’s equity; if the business incurs a loss, it decreases owner’s equity.
  • Draws or Withdrawals: Amounts that the owner or owners have taken out of the business for personal use during the period. Draws reduce owner’s equity.
  • Ending Equity: This is the total owner’s equity at the end of the period, which will be used as the beginning equity for the next period.

Example of a Statement of Owner’s Equity

Let’s explore a more complex example, representing a corporation. The Statement of Changes in Equity for a corporation can be more intricate due to multiple components of equity, such as common stock, preferred stock, additional paid-in capital, retained earnings, and possibly other categories like treasury stock or accumulated other comprehensive income.

Example of a Statement of Changes in Equity for XYZ Corporation:

XYZ Corporation: Statement of Changes in Equity For the Year Ended December 31, 2023

DescriptionCommon StockAdditional Paid-in CapitalRetained EarningsTreasury StockTotal Equity
Balance, January 1, 2023$10,000$40,000$50,000($5,000)$95,000
Issuance of common stock$5,000$20,000$25,000
Net Income$30,000$30,000
Dividends declared($10,000)($10,000)
Purchase of treasury stock($2,000)($2,000)
Balance, December 31, 2023$15,000$60,000$70,000($7,000)$138,000

In this example:

  • Common Stock: Represents the par or stated value of the shares that have been issued. XYZ Corporation started with a balance of $10,000 and issued more stock during the year, bringing the balance to $15,000.
  • Additional Paid-in Capital: Represents the amount received from shareholders in excess of the par or stated value of the shares. It started at $40,000 and increased due to the stock issuance.
  • Retained Earnings: Represents cumulative earnings of the company that have not been distributed to shareholders. The balance increased due to net income and decreased by the dividends declared.
  • Treasury Stock: Represents the cost of shares that the company has repurchased. It’s a contra equity account, meaning it reduces total equity. XYZ Corporation bought more of its stock during the year, so the balance went from ($5,000) to ($7,000).

By looking at this statement, shareholders and other stakeholders can see the sources of changes in shareholders’ equity during the year, including how the company is financing its operations and returning value to shareholders.

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