Week 7 - Statement of Changes in Owners Equity Flashcards
Since the owner will bear the ultimate responsibility and will be accountable
for the success or failure of the business, it is important to understand the
changes in the owner’s equity or capital in the business. The statement of
changes in equity tells this story
read
this is also known as Owner’s equity. It represents the right of the owner
over the resources of the firm
Capital
It is also called net assets, or residual assets.
From the accounting equation, we can derive owner’s equity
Owner’s equity = Assets - Liabilities
Usually it consists of the owner’s investment and the earned profit less any
withdrawals made during a given period.
Owners equity
This is a type of business which is owned by only one person
Sole or single proprietorship
this is also the manager or boss of his own
business.
Sole or single proprietorship
two or more people join together to
contribute money, property or industry for purposes of dividing the profits
(or loss) among themselves.
PARTNERSHIP
It is composed of five to fifteen people. It is organized by operation of the law
and considered the most complex form of a business organization.
Corporation
Sole proprietorship
what account title should be use for Statement of owners equity
Name of owner, capital
partnership
what account title should be use for Statement of owners equity
Name of owner, capital (create as many
capital accounts as there are owners)
Corporation
what account title should be use for Statement of owners equity
Stockholders’ equity
Like the Statement of Financial Position and Statement of Income, which
have different elements, the Statement of Changes in Equity also has its own.
These are as follows:
Beginning capital represents the total capital at the start of the business. If
the firm has been operating in the past year, the beginning capital of the
current year is the same the ending capital of the previous year.
Investments made by the owner may represent the original investment made
at the start of business, and any additional investments thereafter.
Investments are added to the capital beginning to arrive at the total
investments used during the year.
Net profit is also derived from the income statement and is also added to the
beginning capital and additional investments done during the year. If the
business incurred a net loss, the same is deducted.
Withdrawals or drawings are resources of the firm which were taken by the
owner for personal use.
Ending capital is the difference arrived at after deducting withdrawals from
the sum of the beginning capital, additional investments, and profit. Ending
capital also represents the residual claim of the owner on the total resources
or assets of the firm after deducting the claims of creditors.
Similar to the heading of a statement of income, the statement of changes in
equity will have to show:
Name of business
Statement of changes in equity
Period covered by the statement
this is a Financial Statement that focuses on the residual interest of the
owner in the business.>
The Statement of Changes in Equity
represents the total capital at the start of the business. If
the firm has been operating in the past year
beginning capital
the ________ of the
current year is the same the ending capital of the previous year.
beginning capital
______ made by the owner may represent the original investment made
at the start of business, and any additional _______ thereafter.
________ are added to the capital beginning to arrive at the total
investments used during the year
investment
also derived from the income statement and is also added to the
beginning capital and additional investments done during the year. If the
business incurred a net loss, the same is deducted.
net profit
are resources of the firm which were taken by the
owner for personal use
withdrawals or drawings
the difference arrived at after deducting withdrawals from
the sum of the beginning capital, additional investments, and profit.
ending capital
represents the residual claim of the owner on the total resources
or assets of the firm after deducting the claims of creditors.
ending capital
what are the Steps in Preparing the Statement of Owner’s Equity
Step 1. Gather the needed information
The Statement of Changes in Owner’s Equity is prepared second to the Income
Statement. We will still be using the same source of information. Again, the most
appropriate source of information in preparing financial statements would be
the adjusted trial balance. Nonetheless, any report with a complete list of updated
accounts may be used. We will also be using the Income Statement later in the
process.
Step 2. Prepare the Heading
The heading is made up of three lines. The first line contains the name of the
company. The second line shows the title of the report: it would be Statement of
Changes in Owner’s Equity, Statement of Owner’s Equity, or simply Statement of
Changes in Equity. The third line shows the period covered. The report covers a span
of time; hence we use For the Year Ended, For the Quarter Ended, For the Month
Ended, etc.
Step 3. Capital at the beginning of the period
Report the capital balance at the beginning of the period reported – or the amount at
the end of the previous period. Remember that the ending balance of the last period
is the beginning balance of the current period.
Step 4. Add Additional Contribution
Contributions from the owner capital, hence added to the capital balance.
Step 5. Add Additional Contribution
Net income increases capital hence it is added to the beginning capital balance. Net
income is equal to all revenues minus all expenses.
Step 6. Deduct Owner’s withdrawals
Withdrawals made by the owner are recorded separately from contributions. You
can easily find it in the adjusted trial balance as “Owner, Drawings”, “Owner,
Withdrawals”, or any other appropriate account. Withdrawals decrease capital,
hence are deducted.
Step 7. Compute for the ending balance
Compute for the balance of the capital account at the end of the period and draw the
lines. One horizontal line means that a mathematical operation has been performed.
Two horizontal lines (double-rule) are drawn below the final amount
The Statement of Changes in Owner’s Equity is prepared second to the Income
Statement. We will still be using the same source of information. Again, the most
appropriate source of information in preparing financial statements would be
the adjusted trial balance. Nonetheless, any report with a complete list of updated
accounts may be used. We will also be using the Income Statement later in the
process.
Step 1. Gather the needed information
The heading is made up of three lines. The first line contains the name of the
company. The second line shows the title of the report: it would be Statement of
Changes in Owner’s Equity, Statement of Owner’s Equity, or simply Statement of
Changes in Equity. The third line shows the period covered. The report covers a span
of time; hence we use For the Year Ended, For the Quarter Ended, For the Month
Ended, etc.
Step 2. Prepare the Heading
