Question

What is Owner Equity and how is it calculated using the basic accounting equation. There are two components of equity on a cost basis balance sheet and three components of equity on a market basis balance sheet. Explain what each of the components is. Why is the extra component of equity on the market basis balance sheet not found on the cost basis balance sheet?

Answer 1

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What is Owner Equity?
Owner Equity is the amount that belongs to the owner. It is net assets of the company. It means Total assets less total liabilities. It is the amount available with the owner after closing of business and paying of all creditor and liabilities.
How is it calculated using the basic accounting equation?
It is calculated as Total Assets - Total Liabilities.
There are two components of equity on a cost basis balance sheet: Share Capital and Retained Earnings.
Three components of equity on a market basis balance sheet: Share Capital, Accumulated Other Comprehensive Income and Retained Earnings.
Capital	It is also called share capital. It may be Common Stock or Preferred Stock or both. It is the amount raised by the owners by issuing stock.
Retained Earnings	This is the accumulated income of the company earned over the period. It include all type of income earned during the period of business.
Accumulated Other Comprehensive Income	These are unrealized gains/losses from investments or other similar assets. These arise because company revalues their assets at the end of the accounting period and record at their market value.
Accumulated Other Comprehensive Income are not found in cost basis balance sheet because this balance sheet is based on the assumption that all the asset and liabilities should be valued at their cost.
So revaluation of assets and liabilities does not arise which does not create Accumulated Other Comprehensive Income.