Statement of Changes in Owner's Equity

1. Statement of Changes in Owner's Equity

You may recall that financial statements are reports providing financial information about a business at a given time.

The"statement of changes in owner's equity" is a financial statement that provides information about changes to the business's equity over a given time period. It can also be referred to as the statement of retained earnings.

So, what is owner's equity? Well, it refers to owner activity—activity such as income, draws, or loss. Typically, the statement of changes in owner's equity involves one year or less of an activity period and details the changes in owner's equity for that time period, similar to the income statement.

The formula for the statement of changes in owner's equity starts with the beginning capital, or the beginning balance in owner's equity at the beginning of the year. Then, we add any investments by the owner, plus any net income that the business might have earned, and then subtract owner drawings, meaning any money that the owner or owners pulled out of the business. This results in the ending owner's equity, or the ending balance in the owner's equity account.

formula to know

Statement of Changes in Owner's Equity

hint

Note that if we have a net loss instead of net income, we would have to subtract the net loss in this formula instead of adding that income.

terms to know

Financial Statements

Reports providing financial information about a business at a given time.

Statement of Changes in Owner's Equity

A financial statement that provides information about changes to the equity of a business for a given time period.

2. Statement of Changes in Owner's Equity vs. Income Statement and Balance Sheet

Next, let's compare the statement of changes in owner's equity with the income statement and the balance sheet.

Similar to the income statement, the statement of changes in owner's equity reflects a period of time and is activity-based. The statement of changes in owner's equity reflects the change in the equity balance. While the balance sheet reflects a point in time, the statement of changes in owner's equity feeds into the balance sheet because we are looking for the ending equity balance.

The income statement contains the net income or loss, which feeds into statement of changes in owner's equity, as you can see in the formula in the previous section. The balance sheet contains ending owner's equity, so the statement of changes in owner's equity feeds to the balance sheet.

big idea

The statement of changes in owner's equity feeds from the income statement and feeds to the balance sheet.

3. Statement of Changes in Owner's Equity: Examples

Let's look at an example of how to prepare a statement of changes in owner's equity.

step by step

1. We start with the header, which includes the company name, the name of the statement--"Statement of Changes in Owner's Equity"--and, similar to the income statement, "For the period ending...", in this case, December 31, 2022, because it is activity-based.
2. Next, we identify our beginning balance at the beginning of the year, which in this case is $300,000.
3. We input any capital added or investment made during the period, such as if the owners put money into the business. For this example, $10,000 of capital was added.
4. We add any net income, and with this example, is $100,000.
5. Take all of the additions, $110,000 in this case, and add it to the beginning balance, to arrive at a total of $410,000.
6. Finally, subtract any drawings to arrive at our ending balance at the end of the year. Note, if we had a net loss, it would go there as well, but in this case, we had net income, so as of December 31, we had a balance of $390,000 in our owner's equity.

Let's look at a second example of the statement of changes in owner's equity.

step by step

1. Again, we have our header--business name, "Statement of Changes in Owner's Equity," and "For the period ending December 31, 2022," because it's an activity-based statement.
2. We start with our beginning balance at the start of the year, $500,000.
3. Input any capital added or investments made during the period: $10,000.
4. In this case, there is no net income to add, so we make a subtotal of $510.000.
5. Then, we subtract our drawings of $10,000. In this case, we also have a net loss of $100,000, so we include this with our subtractions to arrive at our ending balance at the end of the year of $400,000.