Statement of changes in Equity

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The second statement that is prepared after the income statement is the owner's equity statement.

Statement of the owner's equity:

The owner's equity is defined as the liabilities due on the company towards the owner of the company or the partners (owners), this statement is prepared to know the changes that occurred to the equity of the entity's owners during fiscal year, the owner's equity is increased by increasing the capital and profits, and the owner's equity is decreased by decreasing the capital, Owner's Withdrawals (Draws) and losses. The items of the statement differ according to the legal form of the company if it is an individual company (owned by an individual) or a partnership (owned by more than one person) or stock corporation (stocks). The method of making the partnership's statement as well as the method of distributing profits and losses among partners will be explained in the next lessons, but now will be explained of the statement of owner's equity of an individual company .

Amount	Description
xxx	Capital at the beginning of the period
xxx	(+)(-)additions or reductions of capital during the period
(xxx)	(-) Owner's Withdrawals (Draw)
xxx	(+)(-) net income (profit / loss)
xxx	The capital at the end of the fiscal period (net owner's equity)

Elements and items of the statement of owner's equity:

From the previous figure of the statement, you find that the statement of owner's equity includes the following elements:

The capital account at the beginning of the period.
Additions and reductions of capital during the current period, as the owner's equity is increased when the capital increases and the owner's equity decreases when the reduction.
Owner's Withdrawals (Owners Draw) during the period, this leads to decrease the owner's equity.
The net profit or loss at the end of the fiscal period. At the profit the owner's equity increases, and at the loss the owner's equity decreases.
The capital account at the end of the period (net owner's equity).

Example

On 01/01/2020 the balance of capital account of Al-Salam Office was USD 8,000 and during the year the following financial transactions occurred:

On 31/12/2020 the total value of owner cash and in-kind withdrawals by the office owner was USD 3,000
On 31/12/2020 Al-Salam office made a net profit of USD 16,300

Required:

To prepare the statement of changes in equity on 31/12/2020 and to identify the net capital at the end of the period:

Answer:

Statement of Changes in Equity at 31/12/2020
Amount	Description
8000	The capital at the beginning of the period
(3000)	(-) Owner's Withdrawals
16300	(+) net profit during the period
21300	Net capital on 31/12/2020 (net owners' equity)

The capital account appears at the end of the period in the new balance as follows:

The capital account as on 31/12/2020
Debit		Credit
3000	Owner's Withdrawals	8000	Balance of the beginning of the period
21300	Credit balance (Balance c / d)	16300	Profits of the period (income summary)

Notes on the answer:

The data in this example are the same data in the example in the previous income statement lesson.
The owner's equity of the company's owner has changed from USD 8,000 and becomes equal USD 21,300.
The owner's withdrawals account and the income summary are closed in the capital account to show the value of the net capital (ending capital account) , but in practice, according to the applicable laws in some countries. Changing the capital account from one fiscal period to another requires legal procedures and changes, so it is preferable that these accounts are closed in the owner's current account or in a retained profits account, so that the capital account remains stable as recorded in the entity's contract, this is what will be explained in the account closing lesson..

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