How to prepare a statement of owner’s equity

The statement of owner's equity shows how your stake in the business changes over a reporting period by reflecting the combined impact of profits, losses, contributions, and withdrawals. It helps you understand what’s driving shifts in your company’s value and why your ownership position may have changed. Because it connects your income statement to your balance sheet, it also shows how operational performance flows into long-term equity.

What is a statement of owner’s equity?

A statement of owner’s equity is a financial report that details changes in company equity over a specific accounting period and the total value of assets held by the company after deducting all liabilities.

Generally speaking, owner’s equity is calculated by subtracting net loss and withdrawals from net income and capital contributions. When profits outweigh losses, the owner’s equity will be positive; when losses outweigh profits, the owner’s equity will be negative.

Owner’s equity statements are primarily used by privately held businesses, most commonly sole proprietorships or LLCs. Publicly traded corporations, on the other hand, will typically need to prepare a stockholder’s equity or shareholder’s equity statement, which reflects contributed capital and is a more complex financial statement that factors in components such as stock distributions and dividend payments.

Beyond the core calculation, the statement helps you understand why your ownership stake changes from one period to the next and how those changes signal financial stability. Owners use it to track growth, while lenders and investors use it to evaluate performance. Terminology shifts slightly by business structure, with sole proprietorships and partnerships using “owner’s equity” or “partner’s equity,” and corporations using “shareholder’s equity” or “stockholder’s equity.”

Key components of owner's equity

Every statement of owner’s equity includes five core elements that show how your ownership stake changes over the reporting period.

• Beginning capital balance: The owner’s equity amount at the start of the period, carried forward from the previous period’s ending balance
• Additional investments/contributions: Cash or assets the owner puts into the business to increase their stake
• Net income or loss: The profit or loss from operations, transferred directly from the income statement
• Owner withdrawals/drawings: Money or assets the owner takes out for personal use, which reduces their equity stake
• Ending capital balance: The final equity amount after all additions and subtractions, which carries forward to the next period

Together, these components create a clear record of how and why ownership value changed during the period.

How owner's equity relates to other financial statements

The statement of owner's equity links your core financial reports by showing how net income, losses, contributions, and withdrawals change your ownership stake from one period to the next. It explains why the equity section of your balance sheet increases or decreases over time.

Your income statement determines whether your business generated a profit or loss for the period. That result flows into the statement of owner's equity, increasing or reducing your capital balance based on how the business performed.

The statement of cash flows tells a related but separate story by tracking cash entering and leaving the business. Cash withdrawals appear on both statements, linking your cash position to changes in ownership value and providing more context on how your equity shifts over time.

The financial statement flow

Financial statements follow a sequence that builds a complete picture of business performance. The income statement comes first, measuring revenue and expenses to determine net income or loss. That result transfers to the statement of owner's equity as an increase or decrease in your capital balance.

The statement of owner's equity then incorporates other ownership changes, such as new investments or withdrawals, to calculate your ending capital balance. This amount represents your updated ownership stake for the period.

That ending balance carries forward to the equity section of your balance sheet, appearing alongside your assets and liabilities. Together, the statements show how operational performance turns into changes in equity and how those changes shape your overall financial position.

Step-by-step guide to preparing a statement of owner's equity

Follow these five steps to create a statement of owner's equity that accurately reflects changes in your ownership stake.

Step 1: Determine the beginning balance

Your beginning balance comes from the previous period’s statement of owner's equity. The ending balance from your last reporting period becomes the starting point for the current one, showing how equity carries forward over time.

If you're preparing your first statement, your beginning balance equals your initial investment. This includes any cash, equipment, inventory, or other assets you contributed when launching the business. Document this amount carefully because it forms the foundation for tracking equity going forward.

Step 2: Add owner contributions

Any additional investments you make during the period increase your ownership stake and must be added to your beginning balance. Contributions can include:

• Cash deposits you transfer from personal accounts
• Equipment, vehicles, or property you contribute for business use
• Inventory or supplies you buy personally and give to the business
• Real estate or other assets transferred to the company

Record each contribution at its fair market value on the date of transfer. Keep receipts, appraisals, or other documentation to support that valuation, especially for tax and verification purposes.

Step 3: Add net income (or subtract net loss)

Pull your net income directly from the bottom line of your income statement. This figure reflects your business's profitability after expenses and increases your ownership stake.

If your business recorded a net loss, subtract it instead. A loss reduces your equity because the business used more resources than it generated, even if no cash withdrawal occurred.

Step 4: Subtract owner withdrawals

Owner withdrawals reduce your ownership stake because you're removing value from the business for personal use. Withdrawals can include:

• Cash taken out for personal living expenses
• Business assets converted to personal use
• Payments made on your behalf for personal items
• Distributions taken from business profits

Avoid recording withdrawals as business expenses on your income statement. Doing so inflates operating costs and understates net income. Withdrawals are equity transactions and belong only on the statement of owner's equity, not under operational costs.

Step 5: Calculate the ending balance

Your ending balance follows a simple formula:

Owner’s equity = Beginning balance + Contributions + Net income – Withdrawals

This number represents your total ownership stake at the end of the period and transfers directly to your balance sheet.

Confirm accuracy by ensuring your ending balance matches the equity section of your balance sheet. Also check that your net income ties to your income statement and that all contributions and withdrawals have proper documentation.

Statement of owner’s equity example

A simple vertical format makes it easy to see how your ownership stake changes during the period. You can follow this layout in your own spreadsheet or accounting system to build your own statement of owner’s equity:

1. The statement starts with the owner’s capital balance of $45,000 from January 1, carried forward from the previous year’s ending balance
2. The owner made $10,000 in additional investments during the year, such as purchasing new equipment or funding operations, which increases their stake
3. Net income of $28,500 comes directly from the income statement and raises owner’s equity because the business generated profit that remains in the company
4. Owner withdrawals of $15,000 reflect money taken out for personal use. The parentheses indicate that this amount reduces equity.
5. The ending capital balance of $68,500 represents the owner’s total stake on December 31 and becomes the beginning balance for the next period

This format works well for most small businesses and clearly documents how each activity in the period affects owner’s equity.

Common formatting variations

Businesses may adjust the standard owner's equity format based on their reporting needs and the complexity of their equity activity. Common variations include:

• Single vs. multi-step layouts, with multi-step formats used when tracking separate capital accounts
• Monthly, quarterly, or annual statements depending on reporting timelines
• Industry-specific line items, such as partner distributions or prior period adjustments in more complex businesses

Retained earnings vs. owner's equity

Retained earnings represent the portion of a corporation’s profits it keeps in the business rather than distributing to shareholders. This term applies only to corporations and appears within the broader shareholder’s equity section of the balance sheet.

Owner’s equity is a wider measure. It reflects everything the owner has invested in a sole proprietorship or partnership, plus accumulated profits, minus withdrawals. Retained earnings, by contrast, capture only the profit component for corporations after dividend payments.

Business structure determines which term to use. Sole proprietors and partnerships track owner’s or partner’s equity through a single capital account. Corporations separate contributed capital from retained earnings because ownership is share-based and typically involves multiple investors.

When to use each term

Sole proprietorships and partnerships should use “owner’s equity” or “partner’s equity” because these structures track investments, profits, and withdrawals through a single capital account. Using “retained earnings” for these businesses is technically incorrect and can lead to confusion in financial reporting.

Corporations must use “shareholder’s equity” as the broader category, with retained earnings as one of its components. This distinction matters for tax reporting, investor communication, and regulatory compliance, since corporations separate contributed capital from accumulated profits.

Common mistakes to avoid

Errors in preparing a statement of owner's equity can distort your financial picture and make it harder to understand true performance. Some frequent issues include:

• Mixing personal and business transactions, which makes it difficult to track genuine changes in equity
• Incorrectly classifying owner withdrawals as business expenses, inflating costs and understating net income
• Recording transactions in the wrong accounting period or using mismatched date ranges across statements
• Relying on inconsistent categorization or incomplete documentation, which limits the reliability of your financial analysis

Tips for ensuring accuracy

Reliable equity records make it easier to produce trustworthy financial statements and understand how your ownership stake changes over time. These practices can help:

• Maintain separate bank accounts and credit cards for business and personal use to avoid transaction mixing
• Document all owner contributions and withdrawals with clear descriptions and dates
• Reconcile your accounts regularly to catch errors early and confirm balances match supporting records
• Use consistent accounting methods and period cutoffs across all statements to preserve comparability

Use Ramp to gain visibility into cash flow and spend

Preparing a statement of owner's equity is much easier when you have clear, accurate insight into your company’s cash flow and spending. Many businesses still rely on manual processes that make it hard to track transactions, reconcile accounts, and produce reliable financial reports.

Ramp brings these activities into a single platform, giving you real-time visibility across accounting and spend management. Businesses that once spent weeks closing their books now do so in just over an hour, supported by automated workflows that reduce manual effort and limit the risk of errors.

You can explore how Ramp streamlines financial reporting and automates key accounting tasks by visiting our accounting automation software.