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How to Prepare a Statement of Owner's Equity

The "Statement of Owner's Equity", or "Statement of Changes in Owner's Equity", summarizes the items
affecting the capital account of a sole proprietorship business.
A sole proprietorship's capital is affected by four items: owner's contributions, owner's withdrawals,
income, and expenses.
In this tutorial, we will prepare a statement of changes in owner's equity using information from previous
lessons. We will be using the adjusted trial balance from this lesson: Adjusted Trial Balance.

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 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.

Gray Electronic Repair Services


Adjusted Trial Balance
December 31, 2014
Account Title
Debit
Credit
Cash
$ 7,480.00
Accounts Receivable
3,700.00
Service Supplies
600.00
Furniture and Fixtures
3,000.00
Service Equipment
16,000.00
Accumulated Depreciation
$
720.00
Accounts Payable
9,000.00
Utilities Payable
1,800.00
Loans Payable
12,000.00
Mr. Gray, Capital
13,200.00
Mr. Gray, Drawing
7,000.00
Service Revenue
9,850.00
Rent Expense
1,500.00
Salaries Expense
3,500.00
Taxes and Licenses
370.00
Utilities Expense
1,800.00
Service Supplies Expense
900.00
Depreciation Expense
720.00
Totals
$ 46,570.00 $ 46,570.00

Step 2: Prepare the heading


Like any financial statement, 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. In this case, it would be Statement of Changes in
Owner's Equity, Statement of Owner's Equity, or simply Statement of Changes in Equity. Any of the three
would be okay.
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. Some annual financial statements omit the
"For the Year Ended" phrase.

Gray Electronic Repair Services


Statement of Changes in Owner's Equity
For the Year Ended December 31, 2014

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.

Gray Electronic Repair Services


Statement of Changes in Owner's Equity
For the Year Ended December 31, 2014
Gray, Capital - beginning

Note: Since the company started in December 1, 2014, the beginning balance of the capital account is
zero. In the second year of operations, an amount would already be shown in the capital's beginning
balance.

Step 4: Add additional contributions


Contributions from the owner increases capital, hence added to the capital balance.

Gray Electronic Repair Services


Statement of Changes in Owner's Equity
For the Year Ended December 31, 2014
Gray, Capital - beginning
Add: Additional Contributions

$
0
13,200

Tip: You may need to refer to the journal to find out how much contributions were made by the owner.
Other sources of information may also be used such as a log of owner's capital contributions.

Step 5: Add net income


Net income increases capital hence it is added to the beginning capital balance. Net income is equal to all
revenues minus all expenses. We can also refer to the income statement we previously prepared for the
amount.

Gray Electronic Repair Services


Statement of Changes in Owner's Equity
For the Year Ended December 31, 2014
Gray, Capital - beginning
Add: Additional Contributions
Net Income

$
0
13,200
1,060

Step 6: Deduct owner's withdrawals


Withdrawals made by the owner is 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.

Gray Electronic Repair Services


Statement of Changes in Owner's Equity
For the Year Ended December 31, 2014
Gray, Capital - beginning
Add: Additional Contributions
Net Income

$
0
13,200
1,060

Step 7: Compute for the ending capital 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.

Gray Electronic Repair Services


Statement of Changes in Owner's Equity
For the Year Ended December 31, 2014
Gray, Capital - beginning
Add: Additional Contributions
Net Income
Less: Gray, Drawings
Gray, Capital - ending

$
0
13,200
1,060
7,000
$ 7,260

Conclusion
So there you have the preparation of a Statement of Changes in Owner's Equity. It is a report that shows
the items that affect the capital or equity account. Simply, we are just presenting this formula in a formal
report:
Capital, ending = Capital, beg. + Additional Contributions + Net Income - Withdrawals
where: Net Income = Income - Expenses