Statement of Owner's Equity
A Statement of Owner's Equity is a financial statement that presents a summary of the changes in the shareholders’ equity accounts over a given period.
Purpose & Importance
While the ending balances of owner's equity are mentioned in the Balance Sheet, it is often tough to ascertain what caused the changes in the owner's accounts, especially in bigger corporations.
The Statement of Owner's Equity helps users of financial statements to identify the factors that caused a change in the owners' equity over the accounting period.
The Statement of changes in equity discloses significant information about equity that is not presented separately elsewhere in the financial statements and is useful to external users in understanding the nature of changes in the equity accounts.
How does it work?
Owner's Equity begins when capital is invested in the business by the owners and thereafter increased (or decreases) as profits (or losses) are made in the business.
The theory behind the Statement of Owners Equity is to reconcile the opening balances of equity accounts in a company with the closing balances and present this information to external users.
Broadly, the two major types of changes that effect the Statement of Owners Equity are-
(1) changes that originate from transactions with the owners (shareholders) such as issue of new shares, payment of dividends, etc. and
(2) changes that result from changes in net income for the period, total comprehensive income, revaluation of fixed assets, changes in fair value of available for sale investments, etc.
The Statement of Owner's Equity looks very different in Small and Mid Size Firms vs. Big Conglomerates.
Lets go through each one.
Statement of Owner's Equity in Small and Mid Size Firms
The Changes in Owner's Equity in smaller organizations can be rather simple and straightforward.
They increase by Owner contributions and Company Profits.
They decrease by Owner Withdrawals, Dividend Distributions or Company Losses.
The Statement of Owners Equity follows a simple formula -
Beginning capital balance
Add: Any Additional Owner Contributions into the Business
Add: Net Income made by the Business
Less: Any Withdrawals taken by the Owners
Less: Losses made by the Business
= Ending capital balance
Often times, many small and mid sized firms may even choose not to include a Statement of Owner's Equity.
In such cases, the reader of the Financial Statement can ascertain the changes to the equity accounts from the company profit (or loss) which can be seen in the Income Statement and any Ownership Contributions or Cash Dividends which is located in the Cash Flow from Financing Activities in the Statement of Cash Flows.
Statement of Owners Equity in Larger Corporations
A Corporation issues ownership shares called Capital Stock - so it is common to see the Statement or Owners Equity be referred to as Statement of changes in Stockholder's Equity in bigger Corporations.
The many names of Owner's Equity
The Statement of Owners Equity is ALSO referred to as the Statement of Retained Earnings!
An Example of the Statement of shareholders equity can be seen below
This is the Statement of Shareholders Equity for Walmart Inc. for financial year ended 31 January 2017.
As seen above, The Statement of shareholders equity is normally prepared in vertical format, i.e. the equity components appear as column headings and changes during the year appear as row headings.
Typically, a statement of shareholders equity summarizes changes in the following equity components:
- Common stock, which represents the legal capital of the company and it equals the product of shares issued and the stated value of each share.
- The Capital in Excess of Par Value, which is the excess of paid-up capital over the legal capital. The Additional paid-up capital = (issue price – stated price) x Total number of shares issued.
- Treasury Stock which represents the value of shares repurchased by the company. It is a contra-account to the paid-up capital.
- Capital Reserves
- Retained Earnings
- Gains & Losses on cash flow hedge: unrealized portion of change in fair value.
- Gains & Losses on available for sale securities: i.e. the unrealized portion of change in fair value.
- Reservation Surplus: Represents the effect of Revaluation of Fixed Assets.
Certain types of Gains and Losses are recorded directly in the stockholders equity accounts instead of going through the income statement.
This is a rather sneaky way of by passing the income statement.
In this way, gains and losses do not effect the bottom line profit of a business that is reported in the Income Statement.
The Professionals - stock analysts, money and investment managers and so on carefully read through and dissect the statement of Owner's Equity (or at least they should!) .
But, for people new to the accounting world, reading the Statement of Changes in Stockholders Equity in an Annual Financial Report for a Corporation can be heavy lifting.
Our advise is start with an understanding of the major items and slowly build from there.
If you want to learn accounting with a dash of humor and fun, check out our video course.
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