How to Define the Statement of Owner's Equity

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A statement of owner's equity is one of the four main financial statements that quantify the financial position of an organization's activities at a particular point in time. Although it may also be commonly known as a statement of shareholder's equity, the purpose is identical. The statement of owner's equity details the changes to the owner's equity account during the accounting period as the organization issues dividend payments and retains money for use within the organization for investment. To fully define the statement of owner's equity, you have to reconcile the previous equity balance with withdrawals (or dividend payments), investments and income of the current accounting period.

Things You'll Need

  • Income statement
  • Balance sheet

Refer to the previous statement of owner's equity to determine the ending balance for the last accounting period. This figure serves as your beginning balance for the current accounting period. You need the beginning balance to calculate the change in the owner's equity account for the current accounting period. This is the first piece of data you need to balance the equity equation.

Calculate net income by subtracting the amount of money you spent on expenses to generate revenue from your organization's operations. The basic net income equation is as follows:

A more specific net income equation accounts for capital gains and losses. Capital gains may be an increase in value of your investment. Conversely, a capital loss is a loss of value on your investment. This is another piece of data you need to generate the statement of owner's equity.

Determine how much money was retained by the organization for investment. Capital investments such as machinery, equipment and the like are all considered assets for the organization if such investment will be used to generate income.

Calculate how much money was withdrawn from the owner's equity account. In general, the owner's equity account is an owner's claim on profits. Higher balances in owner's equity accounts may correlate to low debt levels and may be a sign of the good financial health of an organization. Withdrawals from the owner's equity account for personal use or as dividend payments may affect the ending equity balance that appears on the statement of owner's equity at the end of the accounting period.

Calculate the ending balance for the statement of owner's equity. Calculate the difference between investment and withdrawals from the owner's equity account. Take this figure and add it to income and the beginning equity balance. See the formula below:

ending equity balance = beginning equity balance + investments - withdrawals + income

The total from this formula is the ending equity amount reported on the statement of owner's equity.

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