A statement of owner's equity, also known as a statement of changes in equity, is a financial document that shows how the equity in a business has changed over a certain period. This statement provides a summary of the business's financial performance from the perspective of the equity owners and, along with the balance sheet and income statement, is an important part of a business's financial statements. Typically, a statement of owner's equity is the second financial statement created after the income statement.

Below, we'll cover what business owners should know about statements of owner's equity: what they contain, how they're used, and how to write one.

What's in this article?

• How to prepare a statement of owner's equity in five steps
  
• How is a statement of owner's equity used?
  
• How does a statement of owner's equity relate to a cash flow statement?
  
• Key elements of a statement of owner's equity
  
• Examples of a statement of owner's equity
  
• Benefits and limitations of statements of owner's equity
  
• How Stripe Atlas can help
  

How to prepare a statement of owner's equity in five steps

Step 1: Create a title and heading

The document should be titled "Statement of Owner's Equity" to clearly identify its purpose.

Include the name of the business and the period covered by the statement (e.g. "For the Year Ended 31 December 2024").

Step 2: Determine the beginning owner's equity

This figure is the ending owner's equity from the previous accounting period.

Step 3: Make any additions to equity

List any investments or additional capital the owner contributed during the accounting period.

List the net income from the income statement. This income increases the owner's equity. If the business incurred a loss, this decreases the owner's equity.

Step 4: Include any deductions from equity

List any withdrawals or distributions the owner made. This decreases the owner's equity.

Step 5: Calculate the ending owner's equity

Calculate the ending owner's equity by adding contributions and net income to the beginning equity and subtracting any withdrawals or losses. Here's an example of how to calculate this:

$50,000 (beginning equity) + $30,000 (net income) - $10,000 (withdrawals) = $70,000 (ending equity)

Formatting

• Line items: Represent each of the above elements as a separate line item.

• Alignment: Align all numerical figures on the right-hand side of the page.

• Subtotals: Provide subtotals after each section.

• Final result: Clearly label and distinguish the concluding figure, the ending owner's equity.

How is a statement of owner's equity used?

A statement of owner's equity provides a financial overview of all business activities that have a direct effect on the owner's net investment in the business. This document is used for several important purposes, both internally and externally:

• Performance evaluation: This statement lets owners and stakeholders evaluate the business's performance over a set period of time. By examining changes in equity, stakeholders can gauge how well the business is generating value for its owners.

• Investment decisions: Potential and current investors use this statement to understand the business's financial health and make informed decisions about buying, selling, or holding their investment.

• Credit analysis: Lenders and creditors review this statement to assess the business's financial stability and ability to repay loans. A growing equity position can indicate a lower risk for creditors.

• Financial analysis: This statement helps financial analysts understand how business activities such as earnings retention or distribution policies affect owner's equity.

• Internal planning: Management uses the statement to make key decisions regarding reinvestment in the business, distribution to owners, or other financial strategies to improve the business's growth and stability.

• Tax purposes: This statement can be relevant for tax planning and reporting, particularly for businesses that pay taxes on the basis of the owner's personal income.

How does a statement of owner's equity relate to a cash flow statement?

A statement of owner's equity and a cash flow statement are distinct financial statements. A statement of owner's equity focuses on how net income, owner investments, and withdrawals have affected the owner's equity over a specific period. A cash flow statement details a business's inflows and outflows of cash and categorises them into operating, investing, and financing activities.

Together, these statements provide a comprehensive view of a business's finances. While the statement of owner's equity shows how business performance and owner transactions affect total equity and reflects changes in the net worth of the business, the cash flow statement provides insight into how these and other activities affect the business's cash position. This determines the business's liquidity and financial stability and reveals how well the business generates cash to meet its obligations and fund its operations.

Although these statements differ in focus, some of the figures they include are connected. For example, net income affects owner's equity and acts as a starting point on the cash flow statement in the operating activities section. A statement of owner's equity provides an overview of changes in equity, but a cash flow statement demonstrates how these changes are reflected in cash movements.

Key elements of a statement of owner's equity

The elements of a statement of owner's equity show how business activities during an accounting period have affected the owner's equity. Stakeholders can use this information to assess financial performance and changes in the owner's investments.

• Beginning owner's equity: This is the equity amount at the start of the accounting period. It represents the owner's interest in the business after all liabilities have been subtracted from the assets.

• Contributed capital: These are additional investments that the owner has made during the accounting period.

• Net income: This is the business's earnings after all expenses (including taxes and interest) have been deducted from the revenues. It is the profit that the business has generated during the period. The net income from the income statement is added to the owner's equity.

• Owner's withdrawals (drawings): This is the amount of money or value taken out of the business by the owner for personal use during the accounting period. Withdrawals reduce the owner's equity because they represent assets that are taken out of the business.

• Other adjustments: These are adjustments that affect the owner's equity but don't fit neatly into the other categories. They might include changes in accounting policies or corrections of errors.

• Ending owner's equity: This is the owner's interest in the business at the end of the accounting period. It's calculated by taking the beginning equity, adding the contributed capital and net income, and subtracting any withdrawals and adjustments.

Examples of a statement of owner's equity

Below are examples of a statement of owner's equity for two hypothetical small businesses: ABC Consulting and XYZ Design Studio. These examples illustrate how the statement is structured based on different financial activities throughout the year.

Example 1: ABC Consulting

ABC Consulting
Statement of owner's equity
For the year ending 31 December 2025

Beginning owner's equity, 1 January 2025: $50,000
Add: Net income for the year: $30,000
Less: Owner's withdrawals: $10,000
Ending owner's equity, 31 December 2025: $70,000

Example 2: XYZ Design Studio

XYZ Design Studio
Statement of owner's equity
For the year ending 31 December 2025

Beginning owner’s equity, 1 January 2025: $80,000
Add: Contributed capital during the year: $20,000
Add: Net income for the year: $40,000
Less: Owner’s withdrawals: $25,000
Ending owner’s equity, December 31, 2025: $115,000

Benefits and limitations of statements of owner's equity

Benefits

• Owner insight: The statement offers business owners a clear overview of their financial interest in the business, showing how business operations and decisions have affected their equity. This information can affect decisions about whether to reinvest profits or withdraw earnings.

• Performance tracking: The statement can track financial performance over time, showing how retained earnings and additional investments contribute to the growth of owner's equity.

• Investor decisions: Potential investors can use this statement to determine the financial health and stability of a business and inform their investment decisions.

• Financial transparency: This statement provides transparency in financial reporting by showing how profits are retained in the business or distributed to the owners. This is important for internal and external stakeholders.

Limitations

• Scope: Although the statement provides valuable information about changes in equity, it does not offer a complete picture of a business's financial health and must be interpreted in conjunction with other financial statements.

• Timing: As with all financial statements, the statement of owner's equity presents historical data. Although this information is valuable, it may not always reflect the current or future financial condition of the business.

• Administrative burden: Preparing this statement can be time-consuming, particularly for businesses that have multiple types of equity accounts or frequent changes in equity.

17. Consider business loans

Using business loans as a part of your financial strategy can be a powerful step to expedite your business growth. Here's how to approach this step:

• Determine your need for a loan: Before jumping into the loan application process, assess whether you have a genuine need for a loan. Maybe you need funds for expanding your operations, buying equipment, increasing inventory, hiring staff or smoothing out cash flow. Getting clear about your business's financial needs can help you make a more informed decision about applying for a loan.

• Research different types of loans: There are different types of loans available for businesses, from traditional bank loans and Small Business Administration (SBA) loans to alternative online loans and lines of credit. Each type comes with its own terms, interest rates and requirements. The right choice for you will depend on your specific needs, financial situation and the stage of your business.

• Consider eligibility requirements: Lenders have varying criteria for approving loans. These can include factors such as your credit score, business revenue, the profitability of your business and how long you've been in operation. Before applying for a loan, carefully check these criteria to see if you qualify.

• Prepare your loan application: Once you've chosen a type of loan and confirmed that you meet the lender's criteria, the next step is to prepare your loan application. This involves compiling financial documents such as your business plan, financial statements, tax returns and details of your collateral. You may also need to present a plan outlining how you intend to use the loan and how you will repay it.

• Compare loan offers: If your loan application is approved, you may receive offers from different lenders. Consider each offer's terms carefully, including the interest rate, loan amount, loan term and any additional fees. Be sure you understand the total cost of the loan and how the repayment terms align with your business's financial projections.

Taking on debt is a serious commitment that demands careful planning and consideration. For additional guidance throughout the process, consult with a financial advisor or mentor.

There's no easy shortcut to starting a business. Cutting corners or skipping steps in the early days can create unnecessary friction, confusion or even legal liability down the road. But while much of the work that goes into starting a new business might seem tedious, it's not overly complicated. If you take a thoughtful and methodical approach to this process, and address each step in the correct order, you'll build a foundation that can support all the goals and dreams you have for your business – exactly what motivated you to begin this journey in the first place.