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Case Study: Statement of Changes in Owner's Equity

Case Study: Statement of Changes in Owner's Equity

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Author: Evan McLaughlin
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In this lesson, the student will see a statement of changes in owner's equity being prepared for a hypothetical business.
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"Case Study: Statement of Changes in Owner's Equity"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

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[MUSIC PLAYING] Hey everyone, and welcome to our video today, case study on the statement of changes in owner's equity. So what's today's video about? We're going to talk about a subject company, Legacy Realty, we're going to learn a little bit about them, and then we're going to talk about our company Legacy Realty and the statement of changes in owner's equity. Why they need a statement of changes in owner's equity and then we're also going to prepare a statement of changes in owner's equity for our company, Legacy Realty.

So Legacy Realty. What type of company is it? It's a sole proprietorship, which is a type of company that is owned by a single individual and where the individual and the business are legally treated as the same. Our company's purpose is that they own, lease, and manage rental properties. So they own rental properties, they purchase houses and condominiums, lease them out to tenants, and then they perform their own management of the units, repairs, maintenance, and collection of rents.

Where's the business located? It's located in Washington, DC, and we have a small staff of five people at Legacy Realty. So does our company, Legacy Realty, need a statement of changes in owner's equity? Do you think we need that? The answer is, yes, definitely, we need that. Well why? The statement of changes in owner's equity helps us determine our business performance. OK, so it details the owner activity, investments in, taking money out, tells us if there's been net income or net loss.

OK, so it helps us understand the change in owner's equity for a period. So it's an activity based statement, similar to the income statement that generally covers one year or less of activity. So that's why we need to have the statement of changes in owner's equity. So what's the next step? How do we get to preparing a statement of changes in owner's equity. Well, we have to start with our trial balance worksheet. We need to get some information off of there in order to prepare that statement.

And we need to be able to have an adjusted trial balance. So let's go ahead and take a look at our trial balance worksheet. OK everyone. So we're here on our trial balance worksheet, and what we've done so far is that we've prepared our trial balance, the listing of all of our general ledger accounts, as well as their corresponding debit and credit balances. And now we've also prepared our adjustments and our adjustment explanations.

So we've made corrections to our accounts to match our revenues and expenses with the correct period. We've also had to correct any errors or omissions that we may have made. So we've prepared trial balance, made our adjustments, and now we can prepare our adjusted trial balance, which is our trial balance and then we account for all those adjustments that we need to make to get us to our adjusted trial balance, which as just as the trial balance is, it's a listing of all of our general ledger accounts as well as the corresponding debit or credit balance within that account.

And this adjusted trial balance, this is going to be the source for our financial statements. This is what we're going to use to create those. So let's take this information for Legacy Realty, this adjusted trial balance, and let's go on to the next step. Great. So now that we have that information from our adjusted trial balance, let's go ahead and prepare a statement of changes in owner's equity for our case company, Legacy Realty.

And just like our other financial statements, we start with our header, which starts with our business name, so Legacy Realty Partners. Then we put statement of changes in owner's equity and then we put a line it says for the period ending, in this case, December 31, 2012. So just like our income statement, we have to have this line that says, for the period ending, because this is an activity based statement. So that's our header. So what information do we need?

Well, here we have the information from our adjusted trial balance, which is just our permanent accounts. So you see here our assets, liabilities, and our equity. And our equity is the key piece. And then we also have the income statement. We're going to need to take some information off of our income statement in order to prepare our statement of changes in owner's equity. So the first line is going to be our beginning balance, January 1, in our owner's equity.

So you'll see it there, retained earnings, 112, $200,000 so we're starting with $200,000, and then we would need to add any owner investments or net income, which we had net income in this case, which you can see there at the bottom, net income of $86,500. We didn't have any owner investments during the period, so the only item we have to add is net income. And we subtotal that. And then we need to make out any subtractions for any owner's draws, any money owners pulled out of the business, as well as if we had a net loss.

Well, we know we had net income, so the only item we needed to subtract out are the owner's drawings. So you'll see that in that owner's drawing account right there from our adjusted trial balance. So we subtract owner draws to get us to our ending balance at December 31, 2012 of $276,500 in our owner's equity. So that's our statement of changes in owner's equity for our case study company, Legacy Realty Partners.

So now let's summarize what we talked about today in a nutshell. We discuss our case study company, Legacy Realty, the sole proprietorship, and then we went through an example preparing a statement of changes in owner's equity. It details the owner activity for a period. We looked at our adjusted trial balance, pulling some information from that, and then we also had to pull information from our income statement, our net income, our net loss, in order to create this statement. I hope everybody enjoyed this video and I hope to see you next time.

Notes on "Case Study: Statement of Changes in Owner's Equity"

 

Overview

(00:00-00:43) Introduction and Overview

(00:44-02:07) Case Study Company and Statement of Changes in Owner's Equity

(02:08-05:49) Preparing Statement of Changes in Owner's Equity

(05:50-06:17) Wrap-up and Conclusion