The statement of owner's equity reports changes to an owner's capital in a sole proprietorship.
The Securities Exchange Act of 1934 requires public companies to periodically report financial information. Sole proprietorships prepare a statement of owner's equity (SOE) according to U.S. generally accepted accounting principles (GAAP). An SOE reports an owner's starting equity balance, any change to owner's equity within a reporting period, and the final balance. Equity balances will change due to income, investments and withdrawals occurring within a reporting period.
Context
Under GAAP, U.S. public companies periodically present a balance sheet, income statement and a statement of owner's equity. The SOE can be reported as a separate document or can be combined with either of the other two statements. Partnerships and corporations publish statements similar to the SOE: the statement of partnership equity and the statement of retained earnings and stockholders equity, respectively.
Function
The purpose of the SOE is to show the reasons for any changes to the owner's equity, or "capital," that occurred within the reporting period. Owner's equity represents the book value of a company, and is composed of the owner's contribution to a company and the net income retained within the company. Book value is also referred to as "net assets": assets less liabilities. Healthy companies have positive book values, whereas companies with negative book values are bankrupt. By comparing a company's SOEs from different periods, you can discover trends that may affect the solvency of a company.
Components
The SOE is composed of the following information:
1. Identification of the owner, the statement and the reporting period.
2. The amount of owner's capital at the beginning of the period.
3. Investments into the company during the reporting period.
4. Net income for the period. This figure is taken from the period's Income Statement.
5. The amount of owner's capital withdrawn during the reporting period.
6. The ending amount of owner's capital. This figure is used on the period's Balance Sheet.
International Standards
The International Accounting Standards Board (IASB) sets accounting standards outside the United States. The IASB's International Financial Reporting Standards (IFRS) are similar to the U.S. Financial Accounting Standards Board's presentation standards. The IFRS analog of the SOE is the statement of changes in equity (SOCE). For small companies such as sole proprietorships, the SOCE presents changes to comprehensive income, which is the change to equity from all sources except those resulting from investments by or distributions to owners. On a SOCE, the ending amount of owner's equity is equal to the beginning amount plus comprehensive income and owner's investments, less dividends and withdrawals.
Consolidation
The United States is currently moving towards the adoption of IASB accounting standards. Since 2009, the U.S. Securities and Exchange Commission has allowed large companies to switch from GAAP reporting to IFRS. All U.S. companies must adopt IASB standards by 2016. During the interim, the FASB and IASB are jointly working on several projects to make the two sets of standards compatible prior to the merger. Financial statement presentation is one of these projects.
