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Owner's Equity Statements: Definition, Analysis and How to Create One
By Autumn Banks, TD In-Store Small Business Lead
Monté Foster, SVP, Retail and Small Business Banking
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
Business ABC
Owner's Equity Statement
Period ending December 31, 2020
Next, enter your financial information
Enter your asset and liability information to get your owner's equity total which can be a positive or negative number.
|
Example of positive owner's equity statement |
Example of negative owner's equity statement |
|
|---|---|---|
|
Business ABC, opening equity balance, January 1, 2021 (if your business is new, enter 0) |
$100,000 |
$100,000 |
|
Investments during statement period |
$20,000 |
$20,000 |
|
Net income during statement period |
$75,000 |
$75,000 |
|
Asset subtotal (Opening equity balance + investments + net income) |
$195,000 |
$195,000 |
|
Withdrawals during statement period |
$40,000 |
$80,000 |
|
Net losses during statement period |
$20,000 |
$200,000 |
|
Liabilities subtotal (withdrawals + net losses) |
$60,000 |
$280,000 |
|
Owner's equity total (Asset subtotal minus liabilities subtotal) |
$135,000 |
-$85,000 |
Your final sum represents the owner's equity which you can transfer to your balance sheet. An owner's equity statement is optional for non-corporate entities. Instead, a small business may reference a statement of cash flow or income statement to gauge equity
How can I use my owner's equity statement?
Once you've created your owner's equity statement, it can impact many of your business decisions.
Profit distributions
Positive equity allows you to pay yourself more. Negative equity limits ability to withdraw profits.
Circulation of shares
Positive equity increases the number of shares available to shareholders. Negative equity limits shares available to shareholders.
Employee stockholder ownership plan (ESOP)
Positive equity increases the number of shares available to employees. Negative equity limits shares available to employees.
Capital contributions
Positive equity reduces the need for owner/shareholder capital contributions. Negative equity increases the need for owner/shareholder capital contributions.
Business diversification
Positive equity means you have the capital to fund new business ventures, leading to increased profits.
Expanding your business
Positive equity allows the funding of expansion projects. Negative equity could indicate shrinkage or downsizing.
Borrowing decisions
Positive equity influences the willingness of lenders to approve loans. Negative equity is often deemed as a high risk to lenders.
Staffing decisions
Positive equity could be budgeted for additional staffing needs. Negative equity could lead to layoffs or downsizing.
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