The statement of owner's equity portrays changes in the capital balance of a business over a reporting period. The concept is usually applied to a sole proprietorship, where income earned during the period is added to the beginning capital balance and owner draws are subtracted. The result is the ending balance in the capital account.
The amount of owner's equity is increased by income and owner contributions. The balance is decreased by losses and owner draws. Thus, the format of the statement of owner's equity may include the following line items:
Beginning capital balance
+ Income earned during the period
- Losses incurred during the period
+ Owner contributions during the period
- Owner draws during the period
= Ending capital balance
For example, a business has $100,000 of capital at the beginning of a reporting period. The entity earns $15,000 of income, and the owner withdraws $5,000 from the capital account. The resulting statement of owner's equity reveals the following information:
$100,000 Beginning capital balance
- 5,000 Draw
= $110,000 Ending capital balance
The report may also be described as the statement of changes in owner's equity.