Statement of Owner’s EquityDefined along with Examples

When you think about financial statements, you’d probably think of the main three: the balance sheet, income statement, and statement of cash flows.

And with good reason.

These three financial statements give us a view of the business’s financial condition and performance.

So I can’t fault you if you immediately refer to these three at the mention of financial statements.

But there’s another player that you need to be aware of.

It’s the “statement of owner’s equity”, a financial statement/report that contains information that could be as important as those shown in balance sheets, income statements, and statements of cash flows.

This financial statement contains information about the movement in the owner’s equity of a business.

What causes this movement?

That’s what we’ll find out.

While the balance sheet can provide us with the beginning and ending balance of the owner’s equity, it does not show us any of the details.

And as they say, the devil is in the details.

Details that we can find on a statement of owner’s equity (regarding the movement in the business’s equity).

In this article, we will learn about another important financial statement, the statement of owner’s equity.

We will learn about what information it typically contains, as well as what it means for the intended user.

We will also learn about how we can connect it with the other financial statements.

Finally, we will be interpreting and analyzing the information the statement of owner’s equity presents to us.

By the end of the article, you should have a better understanding of why the statement of owner’s equity is important for a business.

What is Owner’s Equity?

But first, a quick refresher. Let’s talk about owner’s equity.

A common description for owner’s equity is this: it’s the residual amount that the owner can get after subtracting the business’s liabilities from its assets.

To better describe it, let’s refer to owner’s equity as the owner’s stake in the business.

In the event that the business liquidates, the owner’s equity represents the amount that the owner will receive.

Owner’s equity is mainly used for sole proprietorships.

This is because, as the name implies, a sole proprietorship only has one owner.

In a partnership, partners’ equity is used instead, where each partner has a separate capital account.

In a corporation where there are multiple owners, shareholders’ equity is used instead.

While they differ in name, they all refer to the stake held by each owner.

At its inception, the business’s owner’s equity will only consist of the owner’s initial investment in the business.

As the business continues to operate, it will either generate profits or incur losses (ideally, you want your business to generate profits).

Profits increase the owner’s equity as it means that the business was able to generate returns for the owner.

Returns mean that the owner’s investment has grown.

On the other hand, losses decrease the owner’s equity.

Not only was the business unable to generate profits, but losses also mean that the business “consumed” the owner’s investment without providing returns.

There’s another way to increase owner’s equity aside from just profits.

When the owner makes an additional investment, the owner’s equity will increase.

This is because the owner increases his/her stake in the business by doing so.

On the other hand, if the owner withdraws some of his investment, the owner’s equity decreases.

This is because the owner is taking away money/capital from the business.

Statement of Owner’s Equity – What is it?

Now that we know what the owner’s equity is, we can proceed with the next topic: the statement of owner’s equity (a.k.a. statement of changes in owner’s equity).

So, what is it?

Well, it’s a type of financial statement that contains information regarding the movement in owner’s equity.

In other words, it shows us the details of the increase or decrease in owner’s equity.

Let’s use an illustration to better explain it:

As you can see from the above illustration, a statement of owner’s equity shows a business’s owner’s equity at the start and end of the period, as well as whatever increases and decreases it.

In this particular example, the owner’s additional investment as well as the business’s net income increase the owner’s equity.

Meanwhile, drawings made by the owner decrease the owner’s equity.

If the business incurred losses instead of generating profits, you would not see net income as an addition.

Rather, you’ll see net loss as a deduction from the owner’s equity. 

It’s as simple as that, though you can add even more details should you choose to do so.

For example, you can add more details on the additional investments made by the owner (e.g. showing details of each additional investment). 

What’s important is that the beginning and ending balances of the owner’s equity should reconcile with the balance sheet.

Aside from the balance sheet, the statement of owner’s equity also borrows information from the income statement.

Notice that one of the line items is the “Net Income”? Net income is the bottom-line figure of an income statement.

A business typically prepares its statement of owner’s equity annually.

This means that it usually covers a 12-month period.

Our example above covers the movement in owner’s equity from January 1, 2021, to December 31, 2021.

Preparing the Statement of Owner’s Equity

In preparing the statement of owner’s equity, one must secure the needed information first.

These are the following:

• The name of the business
• The period covered by the statement of owner’s equity
• Beginning balance of the owner’s equity as well as the ending balance for reconciliation; you can find both on the balance sheet
• Net income or net loss of the business for the period covered; you can find this figure on the income statement, usually the bottom-line figure
• The additional investments made by the owner during the period covered
• The drawings made by the owner during the period covered

After gathering the information that you need, we can start with the preparation:

The header will consist of three lines which include the following information:

• The first line contains the name of the business
• Next, the second line contains the type of financial statement (statement of owner’s equity in this case)
• Lastly, the third contains information on the period being covered; a statement of owner’s equity is usually prepared annually, which means that it covers a 12-month period

The next section contains the beginning balance of the owner’s equity, as well the items that cause it to increase and/or decrease:

• The beginning balance of the owner’s equity can be found on the balance sheet
• Additional investment refers to the additional injection of cash or capital into the business made by the owner during the period
• Income increases the owner’s equity, while expenses decrease it. When income exceeds expenses, the business will have a net income, which increases the owner’s equity. When expenses exceed income, it will incur a net loss instead which decreases the owner’s equity. You can find this figure on the income statement
• Drawings refer to the withdrawal of cash or capital made by the owner during the period

The last section contains the ending balance of the owner’s equity:

We arrive at this figure by adding all additional investments and net income to the beginning balance of the owner’s equity.

Then we deduct all drawings and net loss, which result in the ending balance of the owner’s equity.

The resulting figure should reconcile with what we can find on the balance sheet.

As an additional tip to make any financial statement more presentable, draw a single line for every total amount that you compute.

Then, draw a double-rule for the bottom-line amount.

What the Statement of Owner’s Equity Tells Us

Unlike corporations or LLCs, a sole proprietorship is more closely tied to its owner.

It’s like an extension of the owner.

As such, it’s more likely to have movements in equity as opposed to corporations where the share capital doesn’t move unless they issue new shares or repossess already issued shares.

The owner has more liberty to move the business’s capital around.

Aside from that, since the owner is invested in the business, s/he would want to monitor the growth of his/her investment.

While the balance sheet and income statement can show the growth of the business, the statement of owner’s equity provides a more focused view on the owner’s stake in the business.

It shows the items that increase and decrease the owner’s equity.

It also categorizes them, which helps the owner in identifying which items increases and drawings are caused by him/her, as well as those caused by the business.

For example, the statement of owner’s equity clearly differentiates owner contributions and drawings from the business’s net income or loss.

This way, the owner will have an idea of how much s/he influences the movement in the owner’s equity.

Seeing the owner’s equity increase is a good thing.

However, it’s even better when the increase is due mostly to the business’s income.

The statement of owner’s equity may not be as important as the three main financial statements for external users.

But for the owner who is invested in the growth of his/her business as well as his/her investment, it is very valuable.