4.05 Statement of Owner’s Equity

Statement of Changes in Owner's Equity

Before beginning this lesson, some important concepts should first be reviewed; they are:

• Account categories of Assets, Liabilities and Equity
• Subcategories of accounts under Equity
• Permanent and temporary account categories
• The Capital account
• The Withdrawals account

Assets, Liabilities and Equity

The three parts of the basic accounting equation, Asset = Liabilities + Owner's Equity of course represents major account categories. Assets are items owned and Liabilities are what is owed. Owner's Equity is broad and it represents the value the owner has in the business. There are two individual accounts under Owner's Equity – Capital and Withdrawals.

• Did Capital and Withdrawals accounts appear on the Income Statement?
  • No

Permanent and Temporary Accounts

Permanent Accounts

Assets, Liabilities and Capital are permanent accounts – these accounts continue on even after the accounting period is closed and a new accounting period begins.

Temporary Accounts

Revenue, Expenses and Withdrawals are temporary accounts – the balances in these accounts are closed and reduced to zero at the end of each accounting period.

Capital Accounts

During the closing process, the balances in the temporary accounts (Revenue, Expenses and Withdrawals) will actually be transferred to the Capital account. The closing process will be discussed in the next lesson.

Capital will increase by Revenue and decrease by Expenses – or to put it another way – Capital will increase by Net Income (Difference between the Revenues – Expenses). Capital will also increase by the amount of investments from the owner.

Withdrawals Accounts

When the owner of a business invests money, it is put directly into the Capital account. What is the accounting entry for an investment? The answer is Cash Debit.

When the owner takes money out of the business, the Withdrawals account is used. Withdrawals will also be closed into the Capital account causing a reduction to the Capital account balance.

What is the accounting entry for a Withdrawal? The answer is Debit.

Statement of Owner's Equity Sample

The Statement of Owner's Equity is prepared to show how the Capital account has been effected.

• Increase Capital:
  • Investment
  • Net Income
• Decrease Capital:
  • Net Loss
  • Withdrawals

Statement of Owner's Equity Sample

When you complete a Statement of Owner's Equity, you will be supplied with a spreadsheet form and will look like the one below.

Statement of Owner's Equity Video

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