Question

Horngren's Accounting,The Financial Chapters (12th Edition)chapter 3,problem 36PA ..HOW to prepare the statement of equity

Answer 1

Solution:-

HOW to prepare the statement of equity:-

The "Statement of Owner's Equity", or "Statement of Changes in Owner's Equity", summarizes the items affecting the capital account of a sole proprietorship business.

A sole proprietorship's capital is affected by four items: owner's contributions, owner's withdrawals, income, and expenses.

In this tutorial, we will prepare a statement of changes in owner's equity using information from previous lessons. We will be using the adjusted trial balance from this lesson: Adjusted Trial Balance. You may also want to take a look at an example here before proceeding.

Step 1: Gather the needed information

The Statement of Changes in Owner's Equity is prepared second to the Income Statement. We will still be using the same source of information.

Again, the most appropriate source of information in preparing financial statements would be the adjusted trial balance. Nonetheless, any report with a complete list of updated accounts may be used. We will also be using the Income Statement later in the process

Step 2: Prepare the heading

Like any financial statement, the heading is made up of three lines. The first line contains the name of the company. The second line shows the title of the report. In this case, it would be Statement of Changes in Owner's Equity, Statement of Owner's Equity, or simply Statement of Changes in Equity. Any of the three would be okay.

The third line shows the period covered. The report covers a span of time, hence we use For the Year Ended, For the Quarter Ended, For the Month Ended, etc. Some annual financial statements omit the "For the Year Ended" phrase.

Step 3: Capital at the beginning of the period

Report the capital balance at the beginning of the period reported – or the amount at the end of the previous period. Remember that the ending balance of the last period is the beginning balance of the current period.

Note: Since the company started in December 1, 2017, the beginning balance of the capital account is zero. In the second year of operations, an amount would already be shown in the capital's beginning balance.

Step 4: Add additional contributions

Contributions from the owner increases capital, hence added to the capital balance.

Tip: You may need to refer to the journal to find out how much contributions were made by the owner. Other sources of information may also be used such as a log of owner's capital contributions.

Step 5: Add net income

Net income increases capital hence it is added to the beginning capital balance. Net income is equal to all revenues minus all expenses. We can also refer to the income statement we previously prepared for the amount.

Step 6: Deduct owner's withdrawals

Withdrawals made by the owner is recorded separately from contributions. You can easily find it in the adjusted trial balance as "Owner, Drawings", "Owner, Withdrawals", or any other appropriate account. Withdrawals decrease capital, hence are deducted.

Step 7: Compute for the ending capital balance

Compute for the balance of the capital account at the end of the period and draw the lines. One horizontal line means that a mathematical operation has been performed. Two horizontal lines (double-rule) are drawn below the final amount.

Conclusion

So there you have the preparation of a Statement of Changes in Owner's Equity. It is a report that shows the items that affect the capital or equity account. Simply, we are just presenting this formula in a formal report:

Capital, ending = Capital, beg. + Additional Contributions + Net Income - Withdrawals
where: Net Income = Income - Expenses