Statement of Owner's Equity
Module 2:
Completing the Accounting Cycle
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Understand the purpose of the Statement of Owner’s Equity
➛ Identify items that increase or decrease owner’s equity
➛ Prepare a Statement of Owner’s Equity correctly
➛ Explain how net income and drawings affect capital
➛ Link the statement to the Income Statement and Balance Sheet
Key Vocabulary
➛ Statement of Owner’s Equity
➛ Beginning Capital
➛ Additional Investment
➛ Net Income
➛ Drawings
➛ Ending Capital
What Is the Statement of Owner’s Equity?
The Statement of Owner’s Equity explains why the capital balance changed during the accounting period.
It answers the question
Why is owner’s capital different from last period?
What Affects Owner’s Equity?
Increases Equity
➧ Additional owner investment
➧ Net income
Decreases Equity
➧ Drawings
➧ Net loss
Beginning Capital
+ Additional Investment
+ Net Income
− Drawings
= Ending Capital
Ending capital is transferred to the Balance Sheet.
Order in the Accounting Cycle
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
Identify Equity Changes
Indicate whether each item increases or decreases owner’s equity
➛ Net Income
➛ Owner’s Drawings
➛ Additional Investment
➛ Net Loss
➛ Expenses
Capital Calculation
Beginning Capital
Additional Investment
Net Income
Drawings
Additional Investment
Net Income
Drawings
20,000
5,000
8,000
3,000
5,000
8,000
3,000
Calculate the ending capital.
Prepare a Statement of Owner’s Equity
The following information relates to Sam Traders for the year ended 31 December
Beginning Capital
Additional Investment
Net Income
Drawings
Additional Investment
Net Income
Drawings
30,000
10,000
12,000
6,000
10,000
12,000
6,000
Task
Prepare the Statement of Owner’s Equity.
True or False
➛ Net income increases owner’s equity.
➛ Drawings are an expense.
➛ Ending capital appears on the Balance Sheet.
➛ Statement of Owner’s Equity is prepared before the Income Statement.
➛ Additional investment decreases equity.
Mini Case Study
A sole proprietor wants to understand why capital increased during the year.
Questions
➛ Which statement explains changes in capital?
➛ Name two items that increase owner’s equity.
➛ What effect do drawings have on equity?
➛ Where does net income come from?
➛ Which statement uses the ending capital balance?
Quick Quiz
➛ What is the purpose of the Statement of Owner’s Equity?
➛ List two items that increase equity.
➛ True or False | Drawings increase capital.
➛ What happens to capital if the business makes a net loss?
➛ Which statement is prepared immediately after the Statement of Owner’s Equity?
Answers ➧ Here
Statement of Cash Flows | Intro ➧ Here