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Preparing Statements of Changes in Owner's Equity

Preparing Statements of Changes in Owner's Equity

Author: Evan McLaughlin
Description:
In this lesson, the student will learn how to prepare the statement of changes in owner's equity.
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Tutorial

"Preparing Statements 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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Hey, everyone, and welcome to our video, today, on Preparing Statement of Changes in Owner's Equity. So what are we covering, today? Well, we're covering the statement of changes in owner's equity. First thing we're going to look at is do a review of our statement of changes in owner's equity. And then we're going to look at a detailed example of preparing a statement of changes in owner's equity.

So let's do a quick review of what the statement of changes in owner's equity is. So what is it? It's a financial statement that provides information about changes to the equity of a business, for a given time period. So changes to equity, over a given time period. So it's period- or activity-based.

So our owner's equity, generally, we're going to be reporting as one year or less activity period, which is similar to our income statement. And it really details the owner activity-- if the owner put any money into the business, took any money out, and if that business generated income or experienced a net loss. So let's look at what our statement of changes in owner's equity formula is.

So we start with our beginning capital. So whatever the balance is, in our beginning capital, as of the beginning of the year. Add any investments that the owner made; add any net income to the business earned; subtract out owner drawings, or any money that the owner or owners pulled out of the business. And that gives us our ending owner's equity balance.

Now, one thing to note. That net income-- if that was a net loss, that would actually be a subtraction, in this formula. So we would have to subtract a net loss. So if we're going to be preparing a statement of changes in owner's equity, the first thing we need to do is look at our adjusted trial balance, which we can get from our trial-balance worksheet. So let's go ahead and take a look at our trial-balance worksheet, that will help us identify the balances and accounts that we need to use to prepare our statement of changes in owner's equity.

OK. So we're going to use our trial-balance worksheet to help us identify the information that we need, in order to prepare our statement of changes in owner's equity. So the first thing we're going to need to do is use our adjusted trial balance, which we've already prepared, as we went through our adjusting process, preparing our adjusted trial balance. And now we're preparing our financial statements. So we need our adjusted trial balance.

And, like I said, the adjusted trial balance is used to prepare the financial statements. And so the other financial statement that we need, in order to prepare our statement of changes in owner's equity, is our income statement, because we need to know if there's net income or loss, for the period. So we need to also have our income statement, from our trial-balance worksheet, which we can use to identify the accounts that we need to put into our statement of changes in owner's equity, which is going to be our drawings.

We're also going to need to capture our beginning balance of retained earnings. And then we're also going to need to know if there's any net income. So let's take a look at preparing a detailed statement of changes in owner's equity, using this information from the trial-balance worksheet.

Now that we've used our trial-balance worksheet to help us identify those accounts, let's go into our preparation. So now, we're going to prepare a statement of changes in owner's equity. So I've captured our adjusted trial balance information, and I've captured our income-statement information.

So let's start with the first line. That's going to be our business name. This is our header. So what's the next line? That's going to be the name of the statement-- in this case, Statement of Changes in Owner's Equity. And, since it's a period- or activity-based statement, we have to include information that says "for the period ending"-- "December 31, 2012," in this case. So "for the period ending"-- blank.

What's the first thing we do? We put in our beginning balance, as of January 1. Now, where do we get that information from? We get it from our adjusted trial balance. So our retained earnings, as of the beginning of the year-- which, in this case, is $12,000.

Next step, we add any net income. So where can we get our net income from? Well, we get our net income from our income statement. You see there, at the bottom, net income, in this case, is $33,500. So we add our net income to that, make a subtotal, and then we have our subtractions. So we have, in this case-- we have drawings. You'll see, there, on the adjusted trial balance, we have owner drawings. So the owner's pulled money out of the business.

So if we include that $2,000, here, less owner drawings, and now, we don't have to include a net loss as a subtraction, because, in this case, we had net income. So, if we subtract out our owner draws, that gets us to our ending balance, as of December 31, of $390,000.

So that's what we need to do, in order to prepare a statement of changes in owner's equity-- is look at the adjusted trial balance, to pull out all of our equity balances, and then we also have to look at our income statement, to pull our net income into this statement.

So now, let's summarize what we talked about, today, in a nutshell. Again, we covered statement of changes in owner's equity-- which, just as a refresher, is a financial statement that provides information about changes to the equity of a business, for a given time period. So it's an activity-based report about the equity of a business. We did our review, and then we looked at a great comprehensive example of preparing a statement of changes in owner's equity.

I hope everybody enjoyed this video, and I hope to see you next time.