The statement of owner’s equity usually receives less attention than the more familiar income statement or balance sheet, although it is no less important. Companies distribute this financial statement at the end of each reporting period to communicate changes to the owners' equity and allow users to see how the company’s activities impacted their equity for the period.
The statement of owner’s equity includes a heading at the top with specific information regarding the statement. The heading lists the name of the company, the financial statement and the time period to which the statement applies. Below the heading, the statement of owner’s equity lists the beginning balance of the owner’s capital account. Any additional investments by the owner and any net income are added to the beginning balance. Withdrawals by the owner and any net loss are subtracted. The last row lists the ending balance of the owner’s capital account.
Business owners, lenders and suppliers use the statement of owner’s equity to analyze the financial health of the business. Business owners review the statement of owner’s equity to evaluate the activity of the owner’s capital account over the period. Lenders and suppliers review and analyze the statement of owner’s equity to determine the source of the company’s growth.
The statement of owner’s equity determines the ending balance of the owner’s capital account, which is reported on the company’s balance sheet. Most of the account balances reported on the company’s balance sheet come directly from the company’s general ledger. The owner’s capital account is the one account balance that must be adjusted before including it on the balance sheet. The ending balance calculated on the statement of owner’s equity is the amount that should be used on the balance sheet.
The statement of owner’s equity tells the story of how well the company is growing based on the operation of the business rather than an influx of capital from the owner. Calculate the net increase in owner’s capital by subtracting the beginning balance from the ending balance. Compare the net income and the additional investment to see which made a bigger impact on the net increase of owner’s capital. Start-up businesses would show a lower net income and possibly a higher investment. Established businesses should show a higher net income and a lower investment.