30-Second Overview

The statement of owner's equity shows how the net worth of a business changed over a period of time. It starts with the equity balance the business had on day one, adds what the owner put in and what the business earned, subtracts what the owner took out, and lands on the equity balance at the end. It is the bridge between the income statement, which measures performance, and the balance sheet, which measures position on a given date.

Related Terms and Concepts

Synonyms: Statement of Changes in Equity, Statement of Stockholders' Equity

Related: Income Statement, Balance Sheet, Statement of Cash Flows, Accounting Equation, Retained Earnings, Common Stock, Dividends, Net Income

Statement of Owner's Equity

Equity is easier to picture than to define. Buy a $200,000 house with a $25,000 down payment and a $175,000 loan, and your equity in that house is $25,000: what the asset is worth minus what you still owe on it. A business works the same way. Its equity is the net worth left over once every liability is accounted for, and the statement of owner's equity exists purely to track how that net worth moved during a period.

It sits second in the sequence a business prepares its statements. The income statement comes first and produces a net income or net loss figure. The statement of owner's equity picks that figure up and uses it to update the business's net worth. The balance sheet comes third and reports the resulting equity balance as of a specific date. Skip the middle statement and you lose the explanation for why the balance sheet's equity number changed at all.

The Four Things That Move Equity

Only four kinds of activity change owner's equity, and the statement lists them in a fixed order:

• Beginning balance. The equity the business carried into the period. For a brand new business, this is zero.
• Investments by owners. Cash or other assets an owner puts into the business in exchange for ownership. This increases equity.
• Net income or net loss. Carried directly from the income statement. Income increases equity, a loss decreases it, and a business has one or the other for a period, never both.
• Distributions to owners. Cash or assets paid out to owners as a reward for their investment. This decreases equity. In a sole proprietorship these are called withdrawals or drawings; in a corporation they are dividends.

Add the increases, subtract the decreases, and the result is the ending balance, which becomes the beginning balance for the next period. Written as a formula:

Ending Balance = Beginning Balance + Investments by Owners + Net Income (or − Net Loss) − Distributions

A Real One, Line by Line

A small popcorn shop opens for business in June. Because it is brand new, its beginning equity is zero. During the month the owner puts in $12,500 of his own money, and the business earns net income of $5,800 (the figure carried straight over from that month's income statement). The owner also withdraws $1,450 for personal use. Add the increases, subtract the withdrawal, and equity ends the month at $16,850, which is exactly the number that shows up as owner's equity on the balance sheet dated June 30.

The statement reads chronologically, starting with the first day of the period and working forward to the last, and it follows the same three-line heading and three-column layout as the income statement: business name, statement name, and time period covered on top; account, detail, and total columns below. Here is what that actually looks like on the page.

The single line above the ending balance signals that a total is coming. The double line under it signals that this is the final number on the statement, and it is the only number this statement hands off to the next one.

Same Statement, Different Vocabulary

A sole proprietorship and a corporation prepare this exact statement, but the labels shift with the legal structure. What a sole proprietor calls owner's equity, a corporation calls stockholders' equity, broken further into common stock (what investors paid in for their shares) and retained earnings (accumulated net income the corporation kept rather than paid out). What a sole proprietor calls a withdrawal or a drawing, a corporation calls a dividend. The mechanics do not change. A corporation just has to track the equity of potentially thousands of owners instead of one, so it splits the single owner's equity line into pieces that keep the contributed capital separate from the earned capital.

TLDR

This statement's whole job is to explain why the equity number on the balance sheet is not the same as it was last period. It borrows its net income figure from the income statement and hands its ending balance to the balance sheet, so a mistake anywhere in this chain shows up everywhere downstream of it. The single underline before the final number and the double underline under it are not decoration. They are the visual signal for "a total is coming" and "this is the final answer," and every properly formatted financial statement uses them the same way.