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Owner's Equity

The resources supplied by the owner to his business are called owner’s equity which in the business becomes assets. If the business is a corporation, stockholders' equity or shareholders' equity are used instead.

The accounting equation is:

Assets = owner’s equity

The owner’s equity is therefore the net assets of the company.

Other people lend resources such as loans to the business. These resources are called liabilities which are amounts owing to the people for the assets. Likewise, we can also say that the owner’s equity is the amount owed to the owner by the business. The equation changes:

Assets = owner’s equity + liabilities

Thus, from the above accounting equation, owner’s equity is the owner’s share of the assets of the business after deducting all its liabilities.

For example:

$
Fixtures and fittings 3,000
Stock 2,200
Cash 1,100

6,100
Less: Bank overdraft 1,400

Owner's equity 4,700

 

Statement of changes in owner’s equity

The statement of changes in owner’s equity shows the amount of the owner’s equity at the beginning of the accounting period and the amount of the equity at the end of the period, and in between are the increases and decreases during the period. The increases are usually the introduction of additional capital and the net profit. The decreases are usually the drawings.

A typical statement of changes in equity is like this:

Alice Wonderland Resort
Statement of changes in equity
For the Year Ended Dec. 31, 20XX

$
Owner's equity on Jan. 1 50,000
Add: Capital contribution during the year 20,000

70,000
Net profit for the year 12,000

82,000
Less: Drawings 5,000

Owner's equity on Dec. 31 77,000

Capital investments and revenues increase owner's equity, expenses and drawings decrease owner's equity. As shown on the above statement, the owner’s total investments are $70,000 ($50,000 + $20,000). Added to these is the net profit ($12,000). The drawings of $5,000 are deducted to arrive at the equity at the end of the period.

 

From the trial balance, we can draw up the statement of changes in equity for the firm showing the changes in equity during the year.

Trial Balance of Zebra Crossing Renovation as at 31 December 20XX
Folio Debit Credit
$ $
Motor van 4,500
Tools 1,400
Cash 670
Telephone 250
Wages 1,600
Motor vehicle expenses 230
Bank overdraft 350
Rent receivable 750
Accrued wages 200
Work done 4,450
Drawings 2,600
Capital 7,000
12,000 12,000

 

Income statement to calculate the profit or loss:

$ $
Work done 4,450
Telephone 250
Wages 1,600
Motor vehicle expenses 230

2,080

Net profit 2,370

The above profit of $2,370 is transferred to the statement of changes in equity to calculate the closing amount of the owner’s equity for the year

Zebra Crossing Renovation
Statement of changes in equity
For the Year Ended December 31, 20XX
$
Owner's equity on Jan. 1 5,600
Add: Capital contribution during the year 1,400

7,000
Net profit for the year 2,370

9,370
Less: Drawings 2,600

Owner's equity on Dec. 31 6,770

 

Assets

$
Motor vehicle 4,500
Tools*
1,400
Cash 670
Rent receivable 750

Total assets 7,320

* The owner brought tools worth $1,400 into the business which is a contribution to the capital.

 

Liabilities = Bank overdraft: $350 + accrued wages: $200 =$550

 

Asssets = equity + liabilities

$7,320   = $6,770 + $550

 

From the equation, it’s clear that all the business’s assets must equal to the total amount of all the liabilities and whatever capital the owner/s contribute to the business.

 

Alternatively, the equation can be like this:

 

Assets – liabilities = owner’s equity / $7,320 – $550 = $6,770

 

The owner’s equity of $6,770 is the amount the business owes to the owner.

Last Updated (Wednesday, 15 September 2010 14:56)