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Statement of Changes in Owner's Equity

Statement of Changes in Owner's Equity

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

"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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Hey, everyone, and welcome to our video today on the Statement of Changes in Owner's Equity.

So what are we covering today? Well, today we're covering the statement of changes in owner's equity. We're going to talk about, well, what is it? We're going to compare it to the income statement, and we're also going to compare it to the balance sheet, and then we're going to look at two examples of preparing a statement of changes in owner's equity.

So statement of changes in owner's equity-- it's a mouthful, but what is it? Let's take a step back. Well, what are financial statements? Those are reports providing financial information about a business at a given time. So then what is the statement of changes in owner's equity? It's a financial statement that provides information about changes to the equity of the business for a given time period. And it can also be referred to as the statement of retained earnings.

So changes to the equity-- that's what the statement of changes in owner's equity deals with. So owner's equity-- what is that? Well, it's going to typically be one year or less of an activity period, is what you're trying to identify in the statement of changes, and those are owner's equity. So you're detailing the changes in owner's equity for that time period, similar to our income statement.

So it's owner activity. Any income, draws that were made, there's the loss, things like that.

So now what is the formula for the statement of changes in owner's equity? Well, it starts with our beginning capital, or the beginning balance in our owner's equity at the beginning of the year. Then we add any investments by the owner. We add any net income that the business might have earned, and then we subtract out our owner drawings, so any money that the owner or owners pulled out of the business. And that gets us to ending owner's equity, or the ending balance in our owner's equity account.

So we start with our beginning balance, add investments and net income, and subtract out owner drawings. Now if we have a net loss instead of having net income, that changes things. In that case, we would have to subtract the net loss in this formula instead of adding that income.

So now let's compare the statement of changes in owner's equity with the income statement and the balance sheet. So the income statement is a period of time, which is similar to the statement of changes in owner's equity in that it's activity-based, which is the same for the statement of changes in owner's equity, because you're looking at the change in the equity balance.

And the balance sheet is as of a point in time, which is also similar to the statement of changes in owner's equity, because if you remember back to the last slide, we're trying to get to the ending equity balance, which feeds into our balance sheet.

Income statement contains the net income or loss, which feeds into our owner's equity statement, our statement of changes in owner's equity. So the net income or loss from our income statement feeds into our statement of changes in owner's equity, which you saw from our formula.

And now the balance sheet has ending owner's equity in the balance sheet. So our statement of changes in owner's equity feeds to the balance sheet. So the statement of changes in owner's equity gets information from the income statement and provides information to the balance sheet. So now let's look at a couple examples of statements of changes in owner's equity, starting with this first one.

So we have to start with our header, which in this case, we're going to start with our company name. We're going to put the name of the statement, so the Statement of Changes in Owner's Equity, and then again, we're going to have similar to the income statement, for the period ending blank-- in this case, December 31, 2012, again, because it's activity.

Then we're going to identify our beginning balance at the beginning of the year. We're going to input any capital added or investment made during the period, so if the owners put money into the business. If we had net income, we're also going to add that. So we take all of our additions, $110,000 in this case, add it to our beginning balance to get $410,000.

Now from there, we would need to subtract out any drawings. OK. And if we had a net loss, it would go there as well, but in this case, we had net income. So we subtract out our drawings to get to our ending balance at the end of the year. As of December 31, we had a balance of $390,000 in our owner's equity.

So let's look at a quick second example of the statement of changes in owner's equity. Again, we have our header, business name, statement of changes in owner's equity, for the period ending, in this case, December 31, 2012, because it's an activity-based statement. Start with our beginning balance at the start of the year, any capital added or investments made during the period. Make a subtotal if there's nothing else.

Then we need to subtract out our drawings, and then in this case, if we had a net loss, it would also be a subtraction, so we put that here with our subtractions. Subtotal that. So we have our beginning balance, total capital added, subtract out drawings, net losses to get to our ending balance at the end of the year. So that's what the statement of changes in owner's equity looks like.

So now let's summarize what we talked about today in a nutshell. Well, today was all about our statement of changes in owner's equity. And that's a financial statement that provides information about changes to the equity of a business for a given time period. So it's period or activity-based. It feeds information to the balance sheet and gets information from the income statement. And then we looked at those two examples.

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

Notes on "Statement of Changes in Owner's Equity"

Terms to Know

Financial Statements

Reports providing financial information about a business at a given time.

Statement of Changes in Owner’s Equity

A financial statement that provides information about changes to the equity of a business for a given time period.