Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 559

Financial Statements

Chapter 18

Student Guide

Statement of Owner’s EquityLesson 18.2

The statement of owner’s equity (also commonly referred to as either the statement of stockholder’s equity

or the statement of retained earnings) reports the way that net income and the distribution of dividends

affected the owner’s financial equity during the accounting period. Like all major financial statements, the

statement of owner’s equity has a very specific heading. The date for the statement of owner’s equity is

over a period of time.

The Owner’s Equity section includes the Owner’s Capital and Owner’s Drawing accounts for a sole propri-

etor business. However, corporations obtain their capital by issuing stock; therefore, the Owner’s Equity

section is called Stockholder’s Equity and includes Capital Stock, Retained Earnings, and Dividend ac-

counts.

The net income earned during the accounting period increases the balance of retained earnings, showing

the relationship of the income statement to the balance sheet. The declaration of dividends to the stock-

holders decreases retained earnings. The retained earnings equation that describes these relationships is:

Beginning Capital + Net income – Owner’s Drawing = Ending Capital Account

OR

Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings

Statement of Owner’s Equity (Sole Proprietor)

The statement begins with beginning-of-the-year capital. The current year’s net income reported on the

income statement is added, and the current year’s owner drawings are subtracted from this amount.

ABC Company

Statement of Owner’s Equity

For the Year Ended December 31, 20XX

(in thousands of dollars)

Casey Follows, Capital, January 1, 20XX $6,805

Add: Net income 3,300

Less: Drawing (1,000)

Casey Follows, Capital, December 31, 20XX $9,105