Statement of Owner’s Equity

What is Statement of Owner’s Equity?

Statement of Owner’s Equity is a financial statement that contains the change in the shareholder’s capital (reflecting additions and subtractions of equity due to business transactions) of the entity over a period of time. When the company makes gains, it increases the owner’s equity and when the company makes losses, it eats away the owner’s equity.

The calculation is as follows:

Opening balance of owner’ s equity

+ Income earned during the period

– Losses incurred during the period

+ Owner contributions during the period

– Owner draws during the period

= Ending capital balance

A typical Statement of Owner’s Equity Example starts with the company’s name at the top followed by the heading of the statement and followed by the date for which the statement is being prepared. Now let’s reflect on some examples from the point of view of sheer calculation.

Statement of Owner’s Equity Examples

Example 1

Let’s assume a company Alpha Inc. which has an opening balance of owner’s equity $4,000 million as of January 1, 2018. Now the company raises money from equity investors worth $2,800 million. Also, during the year, the company generated a net income of $1,000 million. Similarly, there were some losses from some non-operating activities worth $200 million. The company’s Statement of Owner’s Equity should look like as follows at the end of December 31, 2018:

Statement of Owner’s Equity Example 1

The company appears to have reached some maturity level in its growth as investors do not seem to infuse more capital into the firm through the earnings still look pretty good. The business might be losing opportunities due to various factors like obsolete product lineProduct LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more, lack of customer-oriented focus, etc.

Example 2

Let’s assume that a company Gamma Tech Corp. has an opening balance of owner’s equity of $52,000 as of January 1, 2018. The company had equity worth $14,00 infused from investors during the year. Also, the company made a profit of $34,500 and distributed $1,000 in the form of dividends. On December 31, 2018, the company’s statement of equity will appear as follows:

Statement of Owner’s Equity Example 2

Usually, the companies that distribute dividends are perceived to have lesser opportunities to invest the capital, and hence they distribute the capital back to investors in the form of dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more. Now, the Gamma Tech Corp. appears to have made a huge profit this year, but giving dividends back may not appear to be a step in the right direction. Investors may perceive it as a mixed signal from the company and may hesitate to invest further.

Example 3

Let’s assume John has a company John Travels Limited. The entity has $150,000 of owner’s equity at the beginning of a reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more, i.e., January 1, 2018. Now, John makes an investment of $10,000 into his company. Also, during the period, the entity earns an income of $20,000.

Though the company never made any losses since inception John urgently required some money for an unwarranted situation and hence had to make a withdrawal of $3000 from the capital account. The sequence of transaction led to the following effect on the Owner’s equity:

Example 3

In this example, the company raised an amount of $10,000 and also earned an income of $20,000. It can be said the company is having good prospects and is valued high among investors who agreed to invest $10,000 in the company. The withdrawals are very meager as compared to the overall spike in figures.

Example 4

Beta Limited started in January 2018 with a seed capital of $80,000. During the year, the owner made $25,000 additional contributions and $5,000 total withdrawals. Assuming that the company did not generate any profit or losses during the period, the Statement of Owner’s Equity would look like as follows:

Example 4

Few points to note here are that from a numerical point of view, the capital increased overall. But it cannot be said that the business is doing well because no income or losses came into the picture. So from the operations point of view, the business does not have any activity.

The entity only raised an amount of $25,000 from investors and had a withdrawal of $5,000. Hence though the capital went up, it was not due to the company’s operations, and hence it is very hard to make any opinion about this business.

Few points to note here are that from the numerical point of view, the capital increased overall. But it cannot be said that the business is doing well because no income or losses came into the picture. From the operations point of view, the business does not have any activity.

The entity only raised an amount of $25,000 from investors and had a withdrawal of $5,000. Hence though the capital went up, it was not due to the company’s operations, and hence it is very hard to make any opinion about this business.

Conclusion

To summarise the examples mentioned above, we can categorize the effects on the Statement of Owner’s Equity into business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more. Income always has an incremental effect on the owner’s capital. Similarly, expenses always have a negative effect on the owner’s equity. Since net profit is the difference between income and expenses, the net income should increase the equity.

But if expenses exceed income leading to a net lossNet LossNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet.read more will decrease the capital account. Also, any withdrawals lead to a decrease in owner’s equity as well. All the examples shown above have some unique situational transactions like income without any losses, dividend distribution, or withdrawals in case of a proprietary company, but the underlying effect is what matters.

Recommended Articles

This article has been a guide to Statement of Owner’s Equity and its definition. Here we discuss the top 4 examples of the owner’s statement of equity along with explanation and calculations. You can learn more about Accounting from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *