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In simple terms, you can calculate owner's equity for your business by subtracting all your business liabilities from the value of all your business assets. When your business makes a profit, owner's equity is positive. When your business takes a loss, owner's equity is negative.
What is an owner's equity statement and what business types use one?
A statement of owner's equity is a one-page report showing the difference between total assets and total liabilities, resulting in the overall value of owner's equity.
Tracked over a specific timeframe or accounting period, the snapshot shows the movement of cashflow through a business. The owner's equity statement is one of four key financial statements and is usually the second statement to be generated after a company's income statement.
Sole proprietorships, partnerships, privately held companies and LLCs typically use the owner's equity statement – also known as statement in changes in owner's equity or statement of retained earnings. Corporations use a shareholder's or stockholder's equity statement, which are more complex and involve dividends and stock components.
What is the purpose of an owner's equity statement?
This important business tool determines overall financial health and stability of your business. The equity statement indicates if a small business owner needs to invest more capital to cover shortfalls, or if they can draw more profits.
Small business owners utilize this data when making business decisions, such as expansion and diversification. Positive equity is an indicator of financial soundness and the ability to cover liabilities. Negative equity could indicate potential bankruptcy or inability to cover costs and expenses. For example, if a business is unable to show its ability to financially support itself without capital contributions from the owner, creditors could reconsider lending the business money.
How is an owner's equity statement created?
First, create the statement heading
The heading of the statement consists of three lines:
- Name of the company
- Title of the statement
Sole proprietors would title the report as an Owner's Equity Statement, partnerships as Partner's Equity Statement and a corporation as Shareholder's Equity Statement
- Period being reported
Owner's Equity Statement
Period ending December 31, 2020