The statement of owners equity is the second report in the financial statements.
Its full name is the statement of changes in owners equity.
This financial report shows all the changes to the owners equity that have occurred during the period.
These changes include:
The format of the statement is shown below:
As you can see, it shows the opening and closing balances of the owner's equity as well as the changes that occurred during this period.
Just like the income statement (the previous report in the financial statements), the statement of owners equity also normally covers a 12-month period.
How do we draw up the statement of owners equity?
Let's return to the trial balance for George's Catering, the sample business we've been using throughout our tutorials:
In order to draw up the statement of changes in equity for George's Catering, we'll take all items in the trial balance that affect the owner's equity (the owner's share of the business) and simply insert these in this new statement.
So, capital and drawings will definitely be included here.
Our capital contributed by George during the period was $15,000, and the drawings came to $500.
The answer is that they do.
However, income and expenses have already been used in the income statement to calculate the profit or loss for the period.
This overall profit or loss figure is now going to be transferred to the statement of changes in equity to calculate the closing balance of equity (after all, profits and losses belong to the owner of the business, right?).
So, let's put it all together...
Here's the statement of changes in equity for George’s Catering:
Note that George's Catering is a brand new business that just started this year, so there was an opening balance of $0 in this example.
As you can see, the closing balance of the owner’s equity is the same as what we calculated in earlier lessons:
This closing balance of $25,800 would become the opening balance of owner's equity for the next year.
So that's the statement of owners equity.
Hope it's a bit clearer now.
In our next lesson you'll learn how this equity statement actually links up with the following accounting report, the balance sheet.
Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)
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