The statement of owner’s equity is the financial statement used to represent the changes in the capital of an individual owner of a business, indicating the net value of the owner’s share.
Explanation:
Equity is the difference between the value of a company’s assets and its financial obligations, thus, reflecting the net worth of the business. In accounting, the statement of owner’s equity is used to report events that affected the equity of the owners during the period. This statement consists of net income, owner’s contributions and withdrawals, and net loss of the company. Calculating the figure requires taking the beginning equity balance and adding net income and contributions of the owner to that amount. After that, net losses and withdrawals are subtracted from the result, providing the equity balance for the period in question. Looking at the calculation step-by-step explains what this financial statement consists of and why it is essential.
As this financial statement deals with the company’s assets, calculating it requires finding the net asset value. This figure provides a monetary equivalent of all the tangible goods that are owned by the business. Such goods include real estate, machinery, tools, resources, and other physical objects that belong to the company. In addition to that, accounts receivable are also considered assets. Adding up these figures is the first step in finding the owner’s equity. Loses of the company and the reduction of the value of its assets is another component of the formula, and it is referred to as contra accounts. This category includes depletion, uncollectable debts of customers, and depreciation of material goods that are owned by the business. Hence, the contra accounts reflect the reduction of the value of the assets that took place during the accounting period. Net asset value is equal to the sum of the value of individual assets reduced by the amount of the contra accounts.
Liabilities of the company are also a part of the formula. This figure indicates the volume of financial obligations of the company to its creditors, the government, employees, and customers. The list of liabilities might include salaries, loans, taxes that have not been paid yet. In addition, the interests and fees that the business needs to pay are also considered liabilities. Computing this figure and subtracting the result from net asset value gives the business equity.
Finding the equity of the company as a whole allows computing the equity of individual owners. This amount is proportional to the size of an owner’s share in the business. Contributions and withdrawals of the owners that occurred during the accounting period should also appear in the statement. If an owner makes a contribution, the amount is added to his capital, whereas his or her withdrawals are subtracted from the figure.
The statement of owner’s equity shows how the net value of owners’ shares changed in the course of an accounting period, and this information is then reported on the balance sheet. The importance of this tool lies in the fact that it illustrates the tendencies regarding the equity balance of a company as a whole, as well as its individual owners. Equity reflects the difference between the net balance of the company’s assets and its liabilities. Financial analysts use this statement to investigate how the value of the business, and hence the owners’ shares, change from one period to the next. In addition to that, the statement of owner’s equity allows seeing what affects the company’s equity and how much.